Last year’s drought resulted in a U.S. corn crop that was 25% smaller than farmers’ planting intentions. So despite the fact that some areas of demand are so weak, it’s hardly surprising that ending stocks for the 2012-13 marketing year are the lowest they’ve been since the1995-96 season. The March USDA crop report estimate was equal to the February estimate, but slightly below analysts’ expectation, at 16.6 million tonnes (632 million bushels), or a scant 5.6% or consumption.
The rationing process has worked well for the most part. High prices have certainly curbed export demand and have set the stage for a bumper 2013-14 crop as farmers were able to lock in their crop at historically high prices. On the domestic-demand front, however, the situation is mixed. Corn-based ethanol usage is down about 10% from last season, replaced in part by Brazilian sugarcane-based ethanol. The Department of Energy’s ethanol usage statistics are roughly in line with the USDA’s estimate.
Feed usage is at about the same level as last year, which is about 10% below the average of the previous 10 years. The near term market is definitely tight, though. Cash corn prices have commanded a steep premium over May futures over the past few weeks (Chart 1). The near-term tightness is being alleviated to some degree with feed wheat substitution. Wheat prices are trading near historic lows vis-à-vis corn prices (Chart 2). There will be greater clarity on the domestic situation with the month-end release of quarterly stocks.
Overseas buyers are still buying U.S. corn on a hand-to-mouth basis. Exports have been just about non-existent. Consider the statistics: Export commitments stand at 14.7 million tonnes, down from 32.1 million tonnes last year at this time. If we don’t see a pick-up in foreign sales, this would be the lowest exports-to-crop ratio in modern history. The March 8 monthly crop report slashed the estimate yet again, by close to 2 million tonnes, to 20.96 million tonnes. That would be down from 2011-12 final sales of 39.18 million tonnes.
The USDA, in a manner of speaking, has written off exports for 2012-13. The low ending stock estimate already has a 50% drop in exports factored in, as illustrated above. Rightfully so, because there is nothing to sell. So we don’t expect to see the pace of old-crop commitments change meaningfully. In any case, South American crops are coming on stream, and near-term business for shipment before the new U.S. crop is harvested in the fall will be the domain of Brazil and Argentina.
Actually, we believe that weak demand in all these categories is no longer a bearish factor. If anything it could potentially be bullish. The problem is that if latent domestic and export demand rears its head, which we believe is just a matter of time, Brazil and Argentina simply do not have the volume to meet the call. Argentinean output returned to normal this year after a disastrous crop last season, and Brazil has maintained output at record levels. Exports of the two countries combined are estimated at 38 million tonnes, down from 41.8 million tonnes in 2011-12. Argentina has no room for increased exports. As it is, its ending stocks are down to 1 million tonnes, or 4% of consumption. Brazil has more ample stocks and can afford to export several million more tonnes, but would risk running its ending stocks down to dangerously low levels.
All of which means there is no room for anything but a picture-perfect U.S. crop. Early projections for 2013-14 US acreage are about 97 million acres, equal to last year’s modern-day-record area.
Our strategy for the moment is to observe from the sidelines. The market is fairly priced. Old-crop prices, hugging the still-way-above-historical-norm $7-per-bushel level are an accurate reflection of the tightness in the domestic feed market, the absence of exports notwithstanding. New-crop December is trading $1.5 per bushel below May (Chart 3). The slightest hint of smaller-than-expected acreage or inadequate subsoil moisture would make December corn a screaming buy. The March 31 inventory and planting intentions reports will tell all. Stay tuned.