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

Corn blinded by uncertain supply data

Markets

USDA has some work to do

USDA’s National Ag Statistics Service (NASS) is in charge of survey work: Things like Grain Stocks, Acreage and Crop Production reports for grains along with Quarterly Hogs & Pigs, Cattle on Feed and Cattle Inventory reports on the livestock side. For two years, the Grain Stocks Report has been the most controversial. In September 2010, corn stocks were 300 million bushels above the average pre-report trade estimate, prompting speculation that NASS had counted 2010-crop corn moving back through time into the 2009-10 marketing year.

In September 2011, corn stocks were about 170 million bushels above the average pre-report trade guess, again spurring an outcry that something is wrong with the Grain Stocks Report. When questioned about how the market could be so off base, NASS Statistics Division Director Joe Prusacki responded, "The market’s expectations were out of line with our numbers."

That’s only half true. Yes, the market anticipated Sept. 1 corn stocks of about 960 million bushels, but those expectations were based on the World Board’s carryover estimate of 920 million bushels delivered just two weeks ahead of the Grain Stocks Report. So yes, market expectations were out of line with the NASS survey results — but so were USDA’s expectations. That — not market expectations — is what’s making the Grain Stocks Report one of the most controversial reports in USDA’s lineup.

At an October meeting of the National Chicken Council, Chairman of USDA’s World Ag Outlook Board (World Board) Gerald Bange told attendees he has trouble explaining the discrepancy between his agency’s Sept. 12 corn carryover estimate of 920 million bushels and NASS’s Sept. 1 corn stocks of 1.128 billion bushels.

Bange told the group, "If you have a stocks number that big, it implies something drastic happened in... the feed and residual category." He reportedly also noted that the larger-than-expected Sept. 1 wheat stocks indicated lower-than-expected wheat feedings in the quarter — something very difficult to explain with the apparent drop in corn-for-feed use.

For reference, cattle numbers in the quarter were (on average) about 5% higher than year-earlier and hog numbers were 1% above year-ago levels. The bigger livestock inventories had traders anticipating an increase in either corn- or wheat-for-feed use.

Bange then pointed to ethanol’s positive profit margins and distillers’ enthusiastic production of the biofuel in the quarter as another reason the bulge in corn stocks came as a surprise.

The conversion rate

The "easy" way to calculate the number of bushels of corn used to produce ethanol is to count the number of gallons coming out of the facilities as reported to the Department of Energy. It would be "easy" if USDA’s World Board were using the right conversion rate for ethanol production. As it stands, the World Board assumes production of 2.7 gallons of ethanol per bushel of corn.

In reality, today’s higher-efficiency ethanol facilities are averaging about 2.83 gallons of ethanol per bushel (some get more than 2.95 gallons). A 2.83-gallon-per-bushel conversion rate is a 4.8% efficiency gain over the World Board’s assumption. At the USDA’s corn-for-ethanol use estimate of 5.02 billion bushels, the 2.83-gallon-per-bushel conversion rate would drop corn-for-ethanol use to about 4.78 billion bushels.

The 240-million-bushel difference between the World Board’s extrapolated number and what might (stressing "might") be actual corn-for-ethanol use has to be accounted for somewhere. That somewhere is the residual component of the feed & residual category. So in reality, nearly 250 million bushels of corn potentially could move from corn-for-ethanol (accounted for in the food, seed & industrial category) over to feed & residual use. Doing that would make feed use better align with the 5% more cattle and 1% more hogs we have on feed heading into the final quarter of 2011.

That’s a lot of detail to get to this conclusion: Trust the number.

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