By Alan Brugler
DTN Consulting Analyst
The USDA Grain Stocks report released Tuesday showed Sept. 1 corn stocks of 1.236 billion bushels, up from 821 million bushels in September 2013. The figure was above the average trade estimate for the sixth time in the past eight years. The September report continues to be the most difficult quarterly report to forecast, a subject I have covered in previous columns. The uncertainties about feed and residual use and consumption of some new-crop supplies in the old-crop slot are the largest contributors to this uncertainty.
This report was actually a fairly small "miss" for the trade by recent standards, and the market reaction was equally muted, with December corn settling 5 cents lower for the day.
There are some things we want to look at within the data that might be informative and color our perception of what comes next. The most immediate question is, "Is there an overhang of old-crop corn that producers are going to have to give away at fire-sale prices in order to clear out bins?" The narrative from certain brokerage house analysts has been that the producer has a lot of leftover corn that he has been too stubborn to sell and will eventually give up on. They use it as an argument for putting a "2" in front of corn prices. Is that the case?
The Sept. 1 on-farm stocks were estimated at 462 million bushels, which is in fact larger than the 275 million bushels a year ago. It is an extra 187 million bushels, from a 13.925 billion bushel crop. This a 1.3% increase in leftovers, or 3.3% of last year's production. Put another way, a 2.2 bushel drop in 2014 yield expectations would make it disappear, or a cut of 1.09 million harvested acres in the October crop report. It is an issue, but not a huge one.
There are some interesting things going on within the different growing areas. Take the Eastern Corn Belt for example, which we define as Ohio, Indiana and Illinois. The first table shows Sept. 1 corn stocks, estimated production from the September Crop Production report (which admittedly may be revised higher) and the total supply available in that region.
We note that Sept. 1 stocks were up 52 million bushels from last year but were not even as large as in September 2012. Because of the large production estimate, total stocks are seen as record large for the first quarter, but only 100 and some million above 2007/08. Regional disappearance that year was 3.646 billion bushels, including exports, industrial use, feed use and shipments out of the area but within the country (mostly to the Southeast). This past year, that disappearance had grown to 3.745 billion bushels. With lower 2014/15 prices and expanded hog and poultry production nationally, further growth in use would be expected. It is important to note that the ECB region also has several more operational ethanol plants than it did in 2007/08, a little more inelastic usage base.
What about the Western Corn Belt (WCB)? The Sept. 1 stocks growth is a little more dramatic, up 208 million bushels for the five states of Iowa, Minnesota, Missouri, Nebraska and Kansas. The production is also expected to be up close to 400 million bushels from last year, vs. less than 200 million in the ECB. Note, however, that total supply for this five-state area is currently seen as smaller than in 2009/10. We'll see if NASS has to change that in the October or November crop reports via larger production estimates.
The use story for the WCB states isn't quite as glowing. Record annual disappearance out of the five-state area was in 2010/11 at 6.202 billion bushels. For the year just ended, it was 5.825 billion bushels. Smaller hog numbers due to the PED virus were likely part of the shortfall, and might recover if the new vaccines and other management strategies are effective.
Another issue is DDG feeding. With the Chinese refusal to import DDGs that might contain the MIR-162 gene, the largest export market for U.S. DDG was effectively closed off. That forced more DDG feeding in the fourth quarter than would otherwise have been the case, and resulted in less feeding of whole corn. Since the WCB has more ethanol plants making the DDGs and more cattle to consume them, the effect of this move is likely more pronounced for the WCB states.
We conclude that the corn market still has a mountain to climb. The regional stocks numbers could be made worse if USDA increases final production numbers via higher yields and can't reduce the harvested acreage estimate. Disappearance is growing to absorb the increased corn availability, but it takes time and it takes price incentives.
When you have too much in inventory, you put things on sale. Low prices do cure low prices over time by both stimulating use and by discouraging future production of that particular commodity. The market will find a bottom, and it will rally as hedge positions are unwound. The speculators can't be blamed for this one, as they are still net long corn. It would help if EPA finally rolls out an expanded ethanol mandate, or at least removes some obstacles to E15 and higher blends. It would help if some other countries around the world decide to plant less corn this winter or next spring, and if U.S. producers do likewise. Expanding livestock numbers will also help take up some slack.
Alan Brugler may be contacted at email@example.com
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