This is a special comment on the Jan. 12 USDA report for Corn.
Much was made by the media and markets last week that the USDA numbers dramatically increased corn yields and supplies and that we are swimming in corn barring a glut. This could hardly be any further from the truth. The headline number that got the large speculators to panic sell yesterday was the two bushel per acre increase in yields which only put the yield number back to what it was in October. What was absent from the media reports was that demand was also bumped up by 140 million bushels mainly from an increase in feed demand. This primarily negated the increase in yields and only bumped up ending stocks by a miniscule 90 million bushels.
If you believe the yields from the USDA in yesterday’s report, this still puts the stocks to usage ratio at the second tightest this decade in the U.S. When one looks at the global stocks to usage ratio base upon yesterdays report the stocks to usage ratio is the lowest since 1974. This is hardly bearish and in fact is an extremely bullish supply/demand situation for 2010. Remember that the increase in feed demand is a very telling story that the USDA is seeing greater and is expecting to see greater consumption. Why? Lower test weights have been reported as a consistent dynamic throughout harvest and such lower test weights mean greater needs to feed more corn to supply the same protein value than if the test weights were more normal. I expect that in the March and June grain stocks report that the USDA will likely lower significantly grain inventories to adjust for the lower test weight issue.
I also find it very interesting that the USDA raised its own estimate for corn cash prices by 15¢ per bushel to range in the $3.40 to $4.00 range. Current spot cash prices in many areas of the Corn Belt are already near the lower side of this range. So why did they raise prices when supposedly we have a glut of corn according to media reports and large speculative fund panic selling? It sounds as though they have become more bullish on corn.
What is even more interesting is that the USDA shortly after issuing the report came out with an official press release indicating that they were going to release an additional supply/demand, corn stocks and yield report on March 10 due to a significant number of unharvested acres that existed in late November which was the basis of this report’s conclusions. They suggested that the unharvested acres at the time were included in the Jan. 12 numbers. They also suggested that respondents to the first survey would be recontacted/resurveyed as up to 1.5 billion to 2 billion bushels of corn were simply stated in the current report as a "best guess". They further indicated in the report that North Dakota and South Dakota would not be resurveyed as weather remained too unfavorable to get a good number. In these two states a good number would not be forthcoming until after March 10.
All in all one should read the USDA's press release as an admission that they are not entirely confident that the Jan. 12 report is a reliable number. As such, one should view the current USDA report with great skepticism. Majority of grain elevator surveys and farm surveys that I have seen from respected private outfits show yields well below the 165/bushel mark. Many have yields under 160/bushel.
To say I am disappointed in last week’s outcome is an understatement. I did not think that the USDA would come out with the numbers that they did. However, when looking under the surface with USDA admitting that insufficient data was available for the Jan. 12 report, their decision to increase the feed demand numbers materially as a first indication of lower test weights and the increase in their corn cash price estimates, I remain as bullish as I was before the report.
In a sense, the USDA simply punted this report further down the field to March 10 and left the numbers fairly unchanged overall. Short term the large speculative funds have a margin call problem that must be resolved before corn prices and the corn bull spreads can firm up again. This margin call selling cleansing process usually takes 2 to 3 days to resolve. I would expect most of this pressure to subside by week’s end and to see a more bullish reassessment of the corn market sometime next week. This is a great buying opportunity for the July 2010/December 2010 bull spread which has backed up to the prime accumulation range of -13¢ to -15¢.
If you are an end user of corn than this will likely be your best opportunity to buy cheap corn for the better part of the year. This trade was recommended in a January Market Strategy article. The violent nature of the move following the USDA report highlights the advantage of entering bull position on a spread.
I am a humbled bull as the USDA hit me with a stiff uppercut but, taking the emotions out of the equation and looking at the situation by the numbers and rationally, I remain an adamant bull on this market and especially the bull corn spreads at current discounted levels. I had thought there was the potential for a more explosive move in the corn price and the corn bull spreads but, given the delayed harvest and longer time to factor in lower test weight data against a psychologically bruised market at the moment, this process appears that it will take a more gradual maturation form from here.
Shawn Hackett, commodities broker and author of the Hackett Flow Report newsletter.
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