It’s happening again. The corn market has put itself in a "can’t-fail" situation. Instead of pushing prices high enough, early enough in the marketing year to slow down use and hold up inventories, the corn market’s slow response to tightening supplies allowed expected stocks to drop too low.
In April, the United States Department of Agriculture (USDA) estimated 2010-11 corn carryover at 675 million bushels — just 5% of expected use. But that’s what is left. Shift your perspective of that number just a bit by sliding it from the bottom of the 2010-11 supply/demand balance sheet (see "Inside corn") to closer to the top of the 2011-12 table in the "beginning stocks" category.
If 2011-12 use is just steady with 2010-11, we’ll start the new marketing year on Sept. 1, 2011 with just 5% of expected use in the bin. That means 95% of demand (again, if use is steady with 2010-11) must be met by the 2011 corn crop. That’s why the corn market — from growers, to futures traders, to end-users and importers — can’t fail in 2011.
The USDA’s April Supply & Demand Report sent several messages and they were fairly easy to hear. For one thing, the USDA’s number crunchers said they are borrowing from the future. They expect increased soft red winter (SRW) livestock feedings this summer to reduce demand for old-crop corn. And they expect increased corn plantings in the South to provide an early supply of 2011-crop corn — early enough (with enough bushels) to help hold old-crop corn carryover up to 675 million bushels.
Borrowing from the future probably happens every year. In fact, we argue it happened at the end of the 2009-10 marketing year when early harvested corn moved back in time to inflate Sept. 1, 2010 corn stocks to 1.708 billion bushels. But when analysts questioned the surprisingly high corn carryover, the USDA’s National Ag Statistics Service (NASS) said there was no commingling of 2010-crop with the old-crop supply. This year, not only is the USDA saying there will be commingling of new- with old-crop supplies, it is counting on it.
Wheat feedings increase
For the first time since summer 1996, front-month corn futures in April traded above front-month wheat futures. In the cash market, corn’s price premium was even bigger. There is no question wheat should work its way into feed rations. In the 1996-97 marketing year (1996-crop wheat fed to offset 1995-crop corn-for-feed use), wheat feed and residual use totaled 310 million bushels, up from 153 million in the previous year. This year, the USDA estimates wheat feed and residual use at 170 million and the agency’s comments suggest 2011-12 wheat feed and residual use over 250 million to offset a portion of 2010-11 corn feedings.
Can Southern corn fill gap?
After denying it happened last fall, the USDA is counting on commingling of 2011-crop corn with old-crop stocks. (The NASS is adding a question in the Grain Stocks Report to address this issue.) Counting on it is dangerous. The USDA’s March 31 Prospective Plantings Report revealed producers expect to plant 565,000 more corn acres in the South (Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina and Tennessee). Yet it’s questionable if corn can be harvested in Kentucky, Louisiana, Missouri and Tennessee in time to be used ahead of Sept. 1, 2011 by the Southern hog and poultry industries. These "questionable" states account for 330,000 (about 60%) of the 565,000-acre increase in Southern corn acres. That leaves about 40% of the increase (235,000 acres) potentially in position to supply new-crop corn to the old-crop marketing year.
Some 2011-crop corn will slip back into the 2010-11 marketing year, but counting on it to hold old-crop carryover up at 675 million bushels is dangerous.
All marketing years are tied together, but the web the USDA has woven around the last three years is unusual. When released, these reports moved the grain markets and are impacting grain trade today:
June 1, 2010 Quarterly Grain Stocks Report: Corn supplies were 300 million bushels below expectations, prompting speculation the USDA had overestimated the 2009 corn crop. While that may have happened, it’s more likely corn prices had fallen too far and demand had ramped up too fast. With use running wild, June 1, 2010 corn stocks were dragged lower.
Sept. 1, 2010 Quarterly Grain Stocks Report: The bushels lost in June were found in September, forcing 2009-10 corn carryover up to 1.708 billion bushels — about 300 million bushels above expectations. That’s the report that triggered widespread speculation early harvested 2010-crop corn had slipped "back in time" to build corn supplies. The USDA, however, said there was no commingling of 2010-crop corn with 2009-crop supplies.
October 2010 S&D Report: The World Board, responsible for S&D estimates, said there was commingling. It increased 2010-11 corn feed and residual use 150 million bushels to partially account for 2010-crop corn that slipped back in time. (While this increased use, it was an adjustment for lower supply.)
Crop Production Reports: The 2010 corn crop was good quality, but yields were below trendline. That was a consistent anchor on 2010-11 corn carryover throughout fall and winter 2010 and into spring 2011.
December 1, 2010 Quarterly Grain Stocks Report: Surprisingly, few surprises.
March 1, 2011 Quarterly Grain Stocks Report: Corn stocks were about 180 million bushels below expectations. That signaled stronger-than-expected use in the first half of the 2010-11 marketing year — or an overestimated 2010 corn crop.
March 31, 2011 Prospective Plantings Report: Corn planting intentions came in bigger than expected on the promise of more acres in "fringe" corn production areas — primarily the South and the Northwest corn belt.
April S&D Report: Traders expected corn carryover to drop below 600 million bushels on stronger-than-expected use. Instead, the USDA’s World Board moved 50 million bushels from feed and residual to ethanol use and borrowed SRW wheat and corn from the future to hold up old-crop corn carryover.
Tie to 2012-13 marketing year: Borrowing from the future is "okay" only if the rest of the U.S. corn crop lives up to expectations. The South isn’t the worry, it’s the Dakotas. North Dakota corn acres are expected up 450,000 acres; South Dakota corn planting intentions are up 850,000 acres from a year ago. If all of those 1.3 million acres don’t get planted to corn, the 2011-12 marketing year will need the bushels from "an early Southern harvest" just as much as the 2010-11 marketing year needs those bushels. If 2011 plantings fall short of intentions (first domino falls), the USDA will be forced to borrow from the 2012 crop (there goes another one) to keep corn in the 2011-12 pipeline. We’ll once again be borrowing from a future that can’t afford to give up any supply.
New-crop corn outlook
Planting intentions for 2011 corn came in above trade expectations, and did little to change the bullish outlook for the 2011-12 marketing year. Some of that credit goes to old-crop use. The USDA got creative in the April Supply & Demand Report to hold carryover up at 675 million bushels, but based on use in the first half of the 2010-11 marketing year, corn carryover should be estimated under 600 million bushels. The Pro Farmer old-crop carryover estimate of 645 million bushels is because of higher feed and residual use than estimated by the USDA. To get to the USDA’s carryover estimate of 675 million bushels, prices would have to rise to slow down use before the end of the marketing year. Under "excellent" growing conditions in 2011, we see the potential for total supplies to jump 5.8% from 2010-11, allowing for a modest 2.7% increase in new-crop use. "Average" growing conditions would push total supplies up 2.6% for a modest 1.3% increase in use. "Poor" growing conditions would see total supplies shrink 0.9%, but prices would have to rally to hold total use steady with 2010-11 carryover.
New-crop soybean outlook
Planting intentions came in below trade expectations, making even tighter carryover the most likely scenario for 2011-12 (see "Inside soybeans"). "Excellent" growing conditions hold the potential to increase total supplies 1.9% from 2010-11. That would allow for very slight growth in U.S. bean crush and minimal increases in Chinese import demand. The result: A 1.5% increase in total use and a slight increase in carryover. "Average" growing conditions would see total supplies shrink 1.3%. We see crush more "willing" to give up use in the year ahead than China will be "willing" to give up imports. Result: A 0.7% cut to use. "Poor" growing conditions would cut total supplies 6.7% from 2010-11 and both domestic use and China’s appetite would have to be cut to force total use down 5.89% to hold carryover just over 100 million bushels.
While corn will be driving the complex this summer, that added acreage will need to come from somewhere, which will affect beans. Also, with the wettest April on record, getting the crop in the ground may be a problem for some growing regions, and some added corn acreage could switch back to beans if things don’t dry up in time.
New-crop wheat outlook
All wheat seedings came in well above trade expectations, but the 700,000-acre increase in North Dakota spring wheat seedings intentions is "questionable." Under "excellent" growing conditions from this point forward, we expect total supplies to increase 2.1% from 2010-11. Total use, however, is expected to contract about 0.6%. Reason: Increased wheat seedings around the globe should increase exportable supplies in many regions, providing more competition for U.S. wheat exports in the year ahead. "Average" growing conditions would see total supplies shrink just 1.3%, but total demand likely will contract 3.2% to force carryover up from 2010-11. Only "poor" growing conditions (total supplies down 4.6%) would result in tighter carryover, with a 5.0% drop in total use.
As noted above, corn will be driving the bus this summer, but beans and wheat are tied to that bus. If corn becomes too expensive, feedlots may look to lower-quality wheat and soy meal to supplement their feed operations. It should be an interesting growing season.
Chip Flory is the editor and publisher of the weekly Pro Farmer newsletter. Pro Farmer is part of Farm Journal Media. Flory has been the editor of the newsletter since 1997 and plays an active role in developing market outlooks for the Pro Farmer membership. Learn more at www.profarmer.com.