Was the May USDA crop report that bearish?

Corn (CBOT:CN14) prices rallied by $1 per bushel, or close to 25%, between January and early this month. Short- and long-term fundamentals appeared bullish for both the supply and demand sides. Sharply lower U.S. acreage for the 2014-15 crop currently being planted, a strong export market, and uncertainty regarding the Ukrainian situation provided a sound bullish case (see Focus on Futures, April 8). The massive two-year-long slide from $8 per bushel seemed to have ended. Then, the May 9 USDA monthly crop report brought an abrupt end to the rally (see the chart bellow).

Old-crop U.S. bullish fundamentals remained intact. To reflect the healthy pace of new commitments, the estimates for 2013-14 export sales were revised upwards by 150 million bushels, and ethanol usage was increased by 50 million bushels. The estimate for ending stocks was lowered to a season- low 1.146 million bushels, or 8.4% of consumption, down from the April estimate of 9.8%, and a far cry from early-season forecasts of 15.5% of consumption.

December Corn

Acreage for the 2014-15 U.S. crop is estimated to fall by 3.9% from the previous season – but that has been known since the March 30 planting intentions report. Although the estimate for record yields of 165.3 bushels per acre was not much of a surprise either, it was somewhat of a confirmation. It comes after USDA analysts have had a chance to look at planting progress. As of the most recent weekly crop progress report, 84% of the crop had been planted, compared with 73% last year at this time.

We believe that the USDA’s exuberance could be a tad premature. While this year’s planting weather has definitely been good, it is below the five-year average of 88%. In addition, while emergence is estimated at 49%, compared with last year’s dismal 34%, it too is below the five- year average of 64% average. Perfect weather conditions would therefore be necessary to meet the USDA estimate.

Global old-crop ending stocks were revised higher by 10 million tonnes, due to increased estimates for the Brazilian crop, an increase in the estimate for 2012-13 ending stocks, and downwardly revised consumption. As a result, the estimate for ending stocks jumped to 17.8% of usage, up from the April estimate of 16.6% – the largest carryover in five years.

Global ending stocks for 2014-15 were substantially higher than expectations – and that is what really caught the street’s eye. The USDA forecast ending stocks at 182 million tonnes, or 18.8% of usage, compared with the average guesstimate of 159 million tonnes.

Actually, production is estimated to be about the same as 2013-14, and consumption is expected to grow by 15 million tonnes. The increase is mostly the result of the upward revision to 2013-14 ending stocks. The major exporters are not expected to grow much larger crops than in 2013-14. So although we are looking at the potential for the largest ending stocks in five years, exportable surpluses will not grow.

Sceptics will argue that this is not an issue because they do not believe that the US will actually ship the mammoth commitments found on the books and that cancellations will emerge sooner or later as foreign buyers switch origins or hold out for cheaper prices. They cite weak early sales for the new crop year as evidence.

Sales have slowed down, but shipments have been quite strong, and there has been no indication that cancellations are on the horizon. With 15 weeks remaining in the marketing year, the USDA target of 48 million tonnes is still very much achievable.

As indicated earlier, domestic ethanol usage is still growing, albeit at a more moderate pace than we’ve become accustomed to. Domestic feed consumption for 2013-14 was at its highest level in seven years.

The U.S. remains the supplier of last resort. Although U.S. ending stocks will finish 2013-14 at their highest level since 2010-11, as we pointed out above, that level was about 46% below early-season estimates. Until it becomes clear that a 165-bushel-per-acre estimate is realistic, we believe the market will find support.

Remain long December corn. Maintain stops at $4.50 per bushel, close only, as per our April 8 recommendation.

About the Author
Sholom Sanik is an analyst with Friedberg Mercantile Group Ltd. He can be reached at ssanik@friedberg.ca
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