Where did that corn come from?

by Ron Sterk
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Nearby December corn futures prices traded below $6 a bu for the first time since July 1 following the U.S. Department of Agriculture’s Sept. 30 Grain Stocks report, which contained a Sept. 1 corn stocks estimate the market interpreted as so bearish it pulled other markets lower, offsetting bullish soybean stocks and wheat production estimates.

The corn market has turned from bullish a few months back, or even a few weeks ago, to seemingly bearish, despite production estimates that have been trimmed more than 1 billion bus from initial projections, Sept. 1 stocks that were down more than a third from a year ago and a stocks-to-use ratio the second lowest in more than 35 years.

The issue with the Grain Stocks report was the relationship of the U.S.D.A. Sept. 1 old crop corn in all positions estimate to trade expectations. The U.S.D.A. carryover of 1,128 million bus was down 34% from Sept. 1, 2010, but was above the high end of trade estimates, that ranged from 820 million to 1,050 million bus, and was 17% above the 962 million bus trade average.

Corn stocks on Sept. 1 are important because it’s the start of the new crop year, and it’s an indication of how much old crop supply will be available, along with new crop, for the 2011-12 marketing year.

Significant was the jump in the Sept. 1 corn number in the Grain Stocks report relative to the projected Sept. 1 beginning stocks number in the U.S.D.A. World Agricultural Supply and Demand Estimates, which was released only a couple of weeks earlier on Sept. 12. The Grain Stocks number was 208 million bus, or 23%, above the WASDE Sept. 1 stocks number of 920 million bus. In fact, the WASDE number had been reduced by 20 million bus from August.

“The stocks number makes no sense,” said Paul Meyers, vice-president, commodity analysis, Connell Purchasing Services, Berkeley Heights, N.J., referring to the Sept. 1 corn stocks number. Market fundamentals also can’t explain the nearly $2-a-bu drop in corn prices from highs earlier in the year amid declining yield and production prospects, he suggested.

The U.S.D.A. in its May WASDE initially projected 2011 U.S. corn production at 13,505 million bus. By September that number had been cut 7% to 12,497 million bus.

Nearby corn futures con-tracts plunged the 40c-a-bu daily limit on Sept. 30, with other months also down sharply. Early last week prices fell further, pressured mostly by outside markets, especially equities and crude oil, both related to global economic concerns. Also adding press-ure was the advancing value of the U.S. dollar, which makes U.S. corn, and grains in general, more expensive for foreign buyers. The U.S. dollar index has risen to its highest level since January, Mr. Meyers noted.

Nearby corn futures prices peaked at an all-time high just one-fourth cent shy of $8 a bu on June 10, and closed that day at $7.87 a bu. Early last week nearby corn futures sank to a low of $5.72¼ a bu and closed at $5.87¾ on Oct. 4, nearly a 10-month low.

A $2-a-bu drop in corn prices was hard to explain even with the bearish Sept. 1 corn stocks number, Mr. Meyers said. He suggested the large price swings, both higher and lower, likely were amplified by commodity and index funds’ trading, which tends to react more significantly to outside markets influences.

The effect of corn supply and price on the wheat market largely has to do with the increased use of wheat (2011-12 marketing year began June 1) for livestock feed. Typically, little wheat is fed to livestock due to its high price in relation to corn, the major U.S. livestock feed making up about 94% of expected 2011-12 feed grain and residual, up from 92% in 2010-11, according to the U.S.D.A. Total feed and residual use of wheat, projected at 240 million bus in 2011-12, is up 80% from 2010-11. But earlier this year, nearby corn futures prices actually were above nearby Chicago soft red winter wheat futures prices. The U.S.D.A. projects 155 million bus of soft red winter will be used in 2011-12, nearly 2½ times the 63 million bus used in 2010-11, up 78% from the prior five-year average, and second only to 161 million bus in 2008-09 in the past 20 years.

But here, too, Mr. Meyers noted there were conflicting U.S.D.A. data about the amount of corn and wheat feeding, which didn’t “match up with livestock numbers.”

Increased wheat feeding illustrates one of the market’s major concerns of demand erosion for corn due to high prices, lower supply or both. Perhaps the greatest unknown is the ethanol sector because of the potential expiration of the blenders’ credit at the end of the year. Corn used for ethanol, the single largest sector at 39% of total corn use, is projected at 5,000 million bus in 2011-12, down from 5,020 million bus in 2010-11 and the first year-over-year drop since 1995.

Expected 2011-12 corn exports have been reduced to 1,650 million bus, down 8% from the initial projection in May.

“The U.S. share of world corn trade is projected to fall below 50% for the first time in 30 years,” the U.S.D.A. said in its September Feed Outlook.

On the other hand, high prices are needed to “ration” corn supply considering the historically low stocks-to-use ratio of about 6.7%, Mr. Meyers said.

“We don’t cut (corn) demand at lower prices,” Mr. Meyers said. “We still need a risk premium.”

Mr. Meyers expects first-half 2012 corn prices to average between $6.25@6.65 a bu, compared with March and May futures prices at the low end of that range last week. In its September WASDE, the U.S.D.A. projected the 2011-12 average farm price of corn to range from $6.50@7.50 a bu, compared with $5.20 in 2010-11 and $3.55 in 2009-10.

More light may be shed on the corn situation when the U.S.D.A. releases its latest Crop Production and WASDE reports on Oct. 12.

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