Tuesday, April 8, 2014

Deep into corn

By Sholom Sanik

March 31 USDA reports were bullish for both the supply and demand side of corn.

The quarterly stocks report has been notoriously volatile. Traders expected the USDA to “correct” its previous estimate. The January 10 quarterly stocks report estimated stocks on December 1 at 10.426 billion bushels (264 million tonnes), 363 million bushels (9.2 million tonnes) below the average of analysts’ guesstimates. Instead, the new data again surprised the market. March 1 stocks were estimated at 7.005 billion bushels (179 million tonnes), 93 million bushels (2.36 million tonnes) under the average guesstimate. As indicated quite clearly in the chart below, the bottom of the market coincided with the release of the January 10 stocks report. The new data have extended the recent rally to seven-month highs.

Estimates for ethanol usage have remained steady at 5 billion bushels. For now, this lays to rest fears that demand for the bio-fuel would taper off without generous government subsidies. With robust feed and ethanol consumption, US domestic demand is solid.

Rounding out the bullish demand side is the continuation of strong US exports. Export commitments stand at 41.3 million tonnes, above the USDA estimate for annual sales which is 40.64 million tonnes. And there are five months remaining in the marketing year. At 22 million tonnes, shipments are about average for this time of year.

The Chinese government has not yet clarified its position on allowing imports of GMO corn. As we’ve pointed out in the past, however, it is not as large an issue as its made out to be in the news. The USDA estimates total Chinese imports from all sources at 5 million tonnes, a bit under 5% of total world trade. The US has already shipped 2.6 million tonnes, with 1.16 million tonnes of outstanding sales.

The March 31 USDA planting intentions report also surprised to the bull side. U.S. farmers are forecast to plant 91.691 million acres, down

sharply from last year’ s 95.365 million acres. It was well known that soybeans stood to capture significant acreage from corn (soybean area is estimated at 81.5 million acres, up from 76.5 million in 2013-14), but the average analyst guesstimate of 92.748 million acres was way off the mark.

The harsh winter weather we had this year should support prices as well because soil temperature is below what is considered normal for planting. Together with rainy weather, planting delays are expected. While this opens an additional vulnerability, it is still very early to worry about late planting. Last year the crop was very late, but excellent growing weather in the latter stages of the summer growing season led to a record crop regardless.

It is widely expected that the Ukrainian crop will be smaller for 2014-15 because farmers will have difficulty obtaining financing for seed and fertilizer due to the financial crisis.

South American crops are now being harvested. Estimates have been volatile, but there shouldn’t be any great surprises.

Despite the record crop harvested in the US last fall, 2013-14 ending stocks will be 20% to 25% below initial estimates because demand has been so strong – particularly exports. Even though global output of 967 million tonnes was a record by far, inventory levels were not rebuilt to comfortable levels because demand for US corn – as illustrated – was much higher than expected. The prospects of a smaller US crop for next fall has traders worried that inventories could once again fall to dangerously low levels.

Remain long December corn as per our January 14 recommendation. Raise stops to $4.50 per bushel, close only.

December corn

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