The USDA delivered a scathingly bearish outlook for corn in its May crop report which contains the first comprehensive forecast for the new crop year. Of course, the bearishness revolves mostly around the anticipated record US corn crop to be harvested this coming autumn. So in a sense, the report was not really that shocking. We already knew from the March 30 planting intentions report that at 95.9 million acres, corn acreage would be the largest in modern history.
However, there were several unexpected items. First, going back to the current 2011-12 marketing year, feed usage was lowered by 50 million bushels. While a large, but not an overwhelming amount, it was not in the spirit of the assumptions made by most analysts that near-term US supplies were so tight. The estimate for ending stocks rose by the same amount, to 851 million bushels, up from the April estimate of 801 million bushels.
Moving on to 2012-13, aside from huge acreage, the quality of the crop is expected to be excellent. Unlike the planting seasons of some recent years, the weather has allowed for rapid planting, which just about eliminates any risk of frost, because an early harvest will be comfortably distanced from cold weather in the late-summer and early-fall. As of the most recent planting progress report, 71% of the crop has been planted, compared with 32% at this time last year and the five-year average of 47%. The estimated yield is 166 bushels per acre (bpa), also at record levels. That compares with an average of 153.9 bpa over the previous five years.
Then – something we’ve been harping on in past issues – ethanol usage has peaked. The last year in which ethanol usage grew was 2010-11. The forecast for the upcoming 2012-13 marketing year is 5 million bushels, unchanged from the previous two seasons. The US farmer has finally addressed the issue of having to allocate the corn crop between the feed market and the ethanol market, but at a time when there is no growth in the ethanol market.
The true test of the viability of the US corn-based ethanol market is how it will fare without government handouts, now that direct subsidies to producers and import tariffs on Brazilian sugarcane-based ethanol imports have been terminated.
US ending stocks are estimated at 1.881 billion bushels, or 13.65% of consumption. That compares with 6.7% and 8.6% in 2011-12 and 2010-11, respectively, and the largest carryover since 2008-09.
Global ending stocks are estimated at 152 million tonnes, or 16.5% of consumption, up from last year’s 14.7%.
A significant amount of FSU winter wheat acreage will we be abandoned (see Focus on Futures, April 30), and the Ukrainian agriculture ministry issued a statement saying that the abandoned wheat area will be replanted with corn for the 2012-13 crop. This would increase the estimate for Ukrainian corn by at least 2 million tonnes, and that is not accounted for yet in the USDA 2012-13 balance sheet.
When we last wrote about corn on April 5, we were bearish for many of the same reasons presented above, but were hesitant to take an outright short position with most of the crop still to be planted. To participate in a bearish corn strategy, we advised a long wheat/short corn spread. As illustrated, however, with most of the crop in the ground at such an early date, planting is no longer an issue. Weather can still wreak havoc as the plants mature, but if all goes well, we can see corn prices retreating to 2010 levels.
It’s been a while since we’ve faced burdensome corn supplies. Strong demand would certainly make a difference, but the USDA has already estimated US exports at 1.9 billion bushels, well above the previous two seasons and the highest level since 2009-10. So to a degree, improved demand has been factored into the balance sheet.
Sell July corn. Place initial stops at $6.40 per bushel, close only.
Maintain long July wheat/short July corn spread.