From the November 2013 issue of Futures Magazine • Subscribe!

A winter’s tale: No dormancy for grains or livestock

The transition from fall into winter trading is an important turning point for grain markets. By now the big questions on the year’s supply are answered. Actual harvest results came in better than expected. The buildup in soil moisture, because of heavy spring and early summer rains, was a key factor in alleviating late summer dryness. The question now is how well demand will be able to accept this supply. 

Grain supply fluctuations from planting through harvest determine almost all of grain pricing from spring through fall. During the winter, though, these markets typically settle down. It is at this time that outside market issues exert a little more influence. Changes in the U.S. dollar, Federal Reserve policy and money flow between equities and commodities are all issues to consider in the weeks ahead.

Corn: Abundant stocks

While the trade has been dialing up its expectation of yields in recent weeks this also has been balanced by revisions in acreage. Allendale’s most recent production estimate, of a record 13.827 billion bushels, is determined from a yield of 158.2 bushels per acre and an acreage decrease. On top of a record production, the U.S. Department of Agriculture (USDA) recently recognized a higher revision in old crop ending stocks. 

A sharp decline in corn prices (CBOT:CZ13) normally will spur demand and, generally, 30% to 70% of a year’s increase in production can be offset by rising demand. But world feed buyers finally are getting adequate corn exports: At last count 45% of USDA’s whole-year sales goal was sold. That is an impressive total for this time of year. Livestock numbers will be slightly higher than last year. Chicken and pork expansion almost will be offset by a 5% increase in cattle feedlots numbers for 2014. The USDA’s models imply that quantity fed per animal fluctuates sharply with corn supplies. Feedlots can switch to distillers’ grains, wheat and other products based on price. With a few more head, and more corn per head feeding, we have no qualms about saying a 5.050 billion feed and residual number, up 575 million bushels from the old crop numbers, is reasonable.

Ethanol will not help mop up this year’s extra supply. Although producers are making strong profits of 50 cents per gallon, they are limited by the blend wall. The EPA adjusted the 2014 ethanol blending mandate down from 14.4 billion gallons to 13.0 in October. Allendale estimates that will limit corn use in the 2013/14 year to only 4.7-4.8 billion bushels, assuming only moderate RIN (Renewable Identification Number) usage.

An ending stock of just over 2.0 billion bushels could give down potential to $3.70 December corn. While corn futures currently have posted a minor rebound off their early October lows, we look for one more attempt at sub $4.20 levels.

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