The USDA has taken corn-market participants on a roller coaster ride these past few months. The first acreage estimate for the 2011-12 crop in March surprised the market with a higher-than-expected forecast of 92.178 million acres. Although US corn area was slated to expand by 4.6% over the previous year, planting-season weather was challenging and after a few days of selling, the bull market resumed regardless.
Normally, the USDA does not revise acreage in the June crop report, but uses the March intentions figure to calculate production estimates until the June 30 update is released. In response to some horrible planting conditions, however, which included massive flooding and potential lost acreage, the USDA slashed the acreage estimate in its regular monthly crop report by 1.5 million acres, or 1.6%. The market traded up to new record highs, but the rally was short-lived. The reaction to that report turned out to be the (temporary?) peak. Prices plunged by more than $1.50 per bushel over the next couple of weeks.
The unfolding events took an even stranger turn. The June 30 acreage update was widely expected to be a confirmation of the downward acreage revision in the crop report. The USDA indicated a certain urgency in making the rather uncommon mid-month revision when the acreage update was only a few weeks away. As such, the average guesstimate for the June 30 figure was 90.767 million acres, just a tad above the revised crop-report estimate of 90.70 million acres.
When the USDA actually raised the figure to 92.282 million acres, slightly higher than the March intentions number of 92.178 million acres, traders were completely confused. Even more compelling: That “very bearish” news initially pushed the market to a new low, but that was the low of the correction and the market rallied by well over $1 per bushel over the following two weeks.
That was arguably the most erratic USDA flip-flop we’ve ever seen.
Traders didn’t know what to expect for the July crop report. Incorporating the extremely bearish June 30 acreage and quarterly stocks report, the average guesstimate for 2011-12 ending stocks was for a jump to 994 million bushels, up from 695 million bushels in 2010-11. The actual figure was 870 million bushels.
While the bearish supply-side fundamentals remained intact this time, there were bullish revisions to all demand categories for 2011- 12. It’s impossible to know if these forecasts will come to fruition, but without a stronger outlook for consumption, carryover stocks would have moved out of bull market territory. Between feed, food, and ethanol, the estimate for domestic usage was revised up by 245 million bushels. This leaves US ending stocks for the upcoming marketing year at 6.44% of consumption.
Without the brighter outlook for the demand side, stocks would have increased to 8.4% of usage. Either way, US inventories are still well below historical norm. In the period between the bull market in the mid-1990s and the current bull market, the average carryover for US corn stocks was 14.8% of consumption. And the US still remains the supplier of last resort, unlike soybeans, for example, where other producing nations have balanced the reliance on US output. In 1996, the US grew 47% of the world’s soybeans, but now produces only 33% of the global total. In 1996 the US grew 37% of the world’s corn and that figure has now increased to 39%.
Chinese imports are expected to surge, from 1.5 million tonnes in 2010-11, to 5 million tonnes in 2011-12. Indeed, Chinese importers have been very active lately. The sizeable upwards revision in the estimate for US exports seems to be adequate to account for the news of Chinese purchases. That puts US exports at 48.25 million tonnes, still significantly below the pre-recession mid-decade records, when US corn exports averaged over 55 million tonnes.
Congress is getting serious about repealing the ethanol tax credit enjoyed by producers. It seems bearish, mostly because profit margins will be slashed and reduce incentive to produce. Ethanol usage is well entrenched, however, mainly because the government mandates a minimum ethanol blend into gasoline, which is legislated to grow until 2022. In any case, the subsidies will not be phased out entirely. In addition, as a replacement for part of the revoked subsidies, the government is going to invest in ethanol-specific infrastructure to create broader accessibility, which – it would seem to us – would increase consumer demand, and that’s bullish.
Meanwhile, hot and dry weather in the US Midwest has brought corn prices back to just shy of all-time highs. Remain long.