The March 30 quarterly stocks report confirmed that near-term US corn supplies were very tight. Inventories as of March 1 were reported at 6.009 billion bushels, 140.75 million bushels below the average trade guesstimate and close to 500,000 million bushels below stock levels the same time last year. The March USDA crop report estimated ending stocks as a percentage of consumption at 6.2%, already the lowest level since 1995-96. If disappearance continues at this pace through the end of the marketing year, the carryover would be the lowest in modern history.
The planting intentions report was released concurrently with the stocks report and tempered the bullishness. US farmers are expected to plant a modern-day record 95.864 million acres to corn, 3.943 million acres more than they did for the 2011-12 crop, but far more significant, 1.144 million acres above the trade guesstimate. And estimates from private forecasters have been growing since the report was released. On April 3, Informa Economics raised its estimate to 96.4 million acres.
The market’s reaction in the trading session following the release of the reports was in sync with their implications. Old crop months May and July rose the 40¢-per-bushel daily trading limit, while new-crop December rose only 16¢ per-bushel, widening the spread, which was already indicating near-term tightness to be alleviated by a monster harvest in the fall (Charts 1, 2, and 3).
Most other corn fundamentals that we’ve been following over the past few months, which could affect the short-term supply picture, remain bullish.
Complicating matters is further confirmation that the Argentinean crop was truly a disaster. Estimates have now slipped below 20 million tonnes, down from the USDA’s March crop report estimate of 22 million tonnes, and down as much as 10 million tonnes from early season estimates, which were based on a vastly expanded planted area.
Late last year the US government stopped protecting the corn-based ethanol industry by removing the import tax on Brazilian sugar based ethanol and halting subsidies to US ethanol producers. Any impact from the elimination of the import tariff, however, has been delayed for the foreseeable future. For the moment, Brazil cannot produce enough ethanol to meet the needs of domestic demand and long-term export commitments, let alone enter into new export agreements with US importers. Brazil is actually a net importer of ethanol.
We are not quite that bullish, however. The quarterly stocks report has proven to be a major market mover for corn over the past year or so, with the USDA finding and losing hundreds of millions of bushels from quarter to quarter. This report was no different. In the days leading up to the report, the price of old crop contract months dropped sharply to multi-month lows, only to have the results of the report send the market back to the high end of the range (not beyond, though).
The export market is key to any sustained tightness, and the hard facts do not support the kind of tightness that market participants seem to be trading on.
The USDA estimate for 2011-12 US exports is 43.18 million tonnes, down 7.3% from last season. Commitments stand at 34 million tonnes, which is down 12.5% from the same time last year. There have been some weeks in which commitments surprised to the upside, but even with the poor South American crops, foreign purchases will shift to Argentinean and Brazilian origins soon enough, leaving the prospect for US exporters to meet the export target in question.
If we muddle through this marketing year, the record acreage on which US farmers are planting their corn crops should serve to replenish US stocks. We should remember that last year’s inclement weather drove the national average yield down to 147.2 bushels per acre (bpa), down from 152.8 bpa the previous year and a record 164.7 bpa in 2009-10. A return to normal yields will overwhelm the silos.
It would be dangerous to take an outright short position in corn when the crop has not even been planted. We continue to advise a long July wheat/short July corn spread (Chart 4), believing that the historical anomaly of wheat trading at or near the price of corn is unsustainable given developments in both the corn and wheat markets.