From the June 01, 2011 issue of Futures Magazine • Subscribe!

Grains outlook: Southern fried corn

Markets

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.

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