The May USDA crop report presented the first comprehensive look at corn for the new marketing year, which begins on September 1. Together with some revisions to the current marketing year, the report painted a bearish picture for the US corn market. With a limit-down selloff in old-crop months and a sharp drop in new-crop months in the session that followed the release of the data, traders certainly viewed it that way (Charts 1 and 2).
The March 31 quarterly stocks report showed significantly lower US inventories than expected. Analysts therefore expected any crop-report revisions to slant to the bullish side. The average guesstimate for US 2010-11 ending stocks was for a moderate drop to 661 million bushels, down from the 675-million-bushel April estimate, but the estimate was revised upwards to 730 million bushels. The results should not have been much of a surprise. Domestic consumption was not changed, only the export estimate was lowered by 50 million bushels, which merely reflected the recent sluggish pace of old-crop sales.
Analysts were off with their forecasts for the new crop as well. The USDA estimate for US ending stocks for 2011-12 was 900 million bushels, up from the average guesstimate of 808 million bushels. Based on March 31 acreage estimates and a significant increase in the estimate for yields, to 158.7 bushels per acre, the new crop is expected to jump to a record 13.505 billion bushels, 8.5% larger than 2010-11 output.
The demand side was bearish as well. Only ethanol usage is expected to grow, by 50 million bushels, to 5.05 billion bushels. Domestic feed is forecast to slip back by 50 million bushels from 2010-11, and exports are expected to fall by 100 million bushels. While the market’s reaction was commensurate with the headlines, a closer look reveals that the US farmer has accomplished little in the way of addressing expanding global demand. First, even when looking at the data in the context of the US alone, this early forecast puts US 2011-12 ending stocks at 6.7% of usage, up from the dangerously low inventories of the current marketing year of 5.4%. Average ending stocks from 2000-01 through 2010-11 were 13.7% of consumption, a level which bred the current bull market to begin with. So at 6.7% of usage, it is hardly a stretch to say that stocks are still in the “dangerously low” zone.
Then, on the global front, output is forecast to grow in all major producing nations. The USDA estimates that global production will jump by 6.4%, while consumption will increase by only 2.6% from 2010-11. After two consecutive years of production/consumption deficits, inventories will expand, but by a negligible amount.Ending stocks for 2011-12 will inch up to 15% of consumption, only marginally higher than 14.6% estimated for 2010-11 and still near record modern-day lows.
As mentioned earlier, the US corn-production estimate is based on a 4-million-acre increase in corn area. Heavier-than-normal precipitation has slowed planting in most corn-growing regions. Devastating flooding is some areas will result in acres being lost to corn altogether, because those regions will not dry up before the planting window for corn has closed. Soybeans, which can be planted later, will see greater-than-expected output. As of the most recent planting progress report, only 40% of the corn crop had been planted, compared with 80% last year, and the 5-year average of 59%.
The expected increase in US output represents over 50% of the increase in global output. If that mammoth jump in production seemed in jeopardy, ending stock estimates would drop quickly.
Although not an imminent concern, bears point to the fact that the growth of US ethanol demand is based solely on generous government subsidies, which survived the last round of legislative challenges, but may not do so indefinitely. In less than10 years, ethanol usage in the US has gone from being a footnote in the industrial section of the USDA balance sheet to all but equaling feed usage. The May crop report estimates 2011-12 feed consumption at 5.1 billion bushels and ethanol usage at 5.05 billion bushels. Which on the one hand illustrates clearly why farmers have had such a struggle keeping up, but on the other should make bulls worry what would happen to prices if there was a successful legislative drive to eliminate subsidies.
We view the recent setback as a correction in a long-term bull market. The output increases still leave global inventories at very vulnerable levels.
Remain long old- and new-crop contract months.
