The corn market had a miserable September, tumbling sharply from all-time highs that reached almost the $8-per-bushel level. On the eve of the October USDA crop report, all the US grain markets had an explosive rally, which sent corn prices up their 40¢-per-bushel limit. Uncertainty regarding what the USDA would do with acreage and yield estimates spooked the shorts, and a massive short-covering rally ensued. After all, the USDA estimates were very volatile for 2011-12, and after falling by $2 per bushel in such a short period of time, the market could easily respond with a powerful corrective rally on bullish news.
On the supply side, the estimate for US 2011-12 planted area was lowered by 400,000 acres. The yield estimate was unchanged from September, at 148.1 bushels per acre. The yield estimate was an ever so slightly bullish factor, because the average trade guesstimate was for an increase to 148.7 bushels per acre. As a result of the acreage revision, the crop estimate was lowered by 64 million bushels, to 12.433 million bushels.
The bearish demand-side revisions, however, dwarfed the smaller crop estimate. The main item was a large revision to last year’s balance sheet. The feed estimate for 2010-11 was lowered by close to 200 million bushels. This should not have come as much of a shock. The quarterly stocks report, released on September 30, showed September 1 stocks at 165 million bushels above expectations.
Then, exports for 2011-12 were lowered by 50 million bushels. That was a bit of a surprise, because although US export commitments are running behind last year’s pace, there were a couple of solid weeks of sales in September.
In addition, there has been a fair amount of discussion about China becoming a significant importer of corn this marketing year. The USDA kept its estimate for total Chinese imports at 2 million tonnes. There have been estimates that put the potential for Chinese imports as high as 10 million tonnes, reflecting surging feed requirements.
Moreover, before the North American trading day began and prior to the release of the crop report, China announced that it is in the market to buy 1.5 million tonnes of corn from the U.S. or Argentina.
The guesstimate for 2011-12 ending stocks was for a jump to 806 million bushels from the September estimate of 672 million bushels. The actual number came in at 866 million bushels.
On the global front, the estimate for Chinese output was raised by 4 million tonnes, but the demand estimate was raised by the same amount. Primarily as a result of the increase in US ending stocks, the estimate for global 2011-12 will move up from 13.6% of consumption, to 14.2%. That is still very low in historical terms.
The US crop was a colossal disappointment. Although the crop was planted on an area that was close to 4 million acres larger than for the 2010-11 crop, the harvest will be no larger. Other countries compensated. Brazil and Argentina are expected to grow record-size crops. Every significant producing region, including the EU and the FSU is in the midst of harvesting much larger crops than it did in 2010-11.
The game changer will be the intensity of Chinese imports. For example, if estimates for Chinese imports are indeed in the neighborhood of 10 million tonnes, and turn out not to be merely idle chatter, that would put global ending stocks at 13.2% of usage – a record low.
In our last discussion regarding corn (see Focus on Futures, September 13) we did not offer a very specific recommendation, but spoke of trading corn from the short side. We definitely recommend covering any short positions at this time. We also recommend wading into the long side with a conservative-sized long position. If the Chinese have begun a bona fide restocking program, this sharp dip in the market presents an excellent, low-risk opportunity. Buy March corn, place initial sell stops at $5.75 per bushel, close only.