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

Corn blinded by uncertain supply data

Markets

The 2010-11 corn market had an important job to do and it got the job done. It had the responsibility of making sure there was an adequate amount of leftover corn to provide some supply cushion for the 2011-12 marketing year. According to the U.S. Department of Agriculture’s (USDA’s) September Quarterly Grain Stocks Report, the market did its job. Barely.

Old-crop ending stocks of 1.128 billion bushels are barely enough supply cushion for a tough 2011 growing season. The uncertainty of the 2011 corn crop started almost a year ago when growers began making planting decisions. The rationing process continued into the spring of 2011 when a soggy and cool planting period resulted in one of the slowest planting seasons on record.

The historic drought in the Southwest was joined by a drier-than-normal growing season in key areas of the eastern corn belt. Rain was far from plentiful in the western corn belt, but soil moisture was enough to help the crop hold onto near-normal yields.

With each of the uncertainties of the new-crop growing season came increased urgency to destroy another portion of old-crop demand to maintain an adequate supply cushion. That created a runaway corn market, climbing to all-time highs as U.S. livestock and ethanol producers and importers of U.S. corn scrambled to buy the corn they’d need until new-crop supplies arrived.

The uncertainty climaxed in late August. At the time most analysts still anticipated a national average corn yield above 150 bushels per acre. When Pro Farmer estimated national average yield of 147.9 bushels per acre at that time, crop uncertainty was replaced with a realization that the 2011 corn crop would fall well short of the hoped-for 13.0 billion bushels needed to feed a corn-hungry world for another year.

Another stocks report; another limit move in corn

The Sept. 29 Quarterly Grain Stocks Report gave corn futures their first chance to try out the new 40¢ daily trading limit, and bears got the job done. But the limit-down move was set in motion long before as hedge funds and speculative traders washed out long positions in grain and other commodity markets. At the end of August, macro-economic issues began to chase speculative longs out of corn, soybean and wheat futures. It was a bad combination of margin calls, Greek debt and a bigger corn supply, a wicked brew for a limit-down price reaction.

In reality, old-crop corn carryover (the new-crop supply cushion) of 1.128 billion bushels is far from adequate. The 2010-11 (old-crop) marketing year started with a supply cushion of 1.708 billion bushels — and the market rallied to an all-time high as it rationed use to keep some bushels in the bin for 2011-12. On Sept. 1, corn began a new marketing year with 580 million fewer bushels in the bin than a year earlier.

Fundamentally, corn is entering the marketing year with a more bullish set of fundamentals than last year. That does not guarantee another highly volatile year of trade with another moon-shot for prices. It does, however, leave the market vulnerable to a repeat performance.

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