Rebuilding corn inventories

August 28, 2014 12:09 PM

With the U.S. corn (CBOT:ZCZ14) harvest just around the corner, it's fair to say that the 2014-15 crop is "made.”

Although the crop was planted on the least amount of acres since 2010-11, output is slated to reach 14.032 billion bushels, surpassing last season’ s record crop. Perfect planting and growing weather are expected to result in record yields. As of the most recent weekly crop-progress report, 73% of the crop was in good-to-excellent condition, compared with 59% last year at this time and compared with the five-year average of 55%.

In response, prices have fallen all the way back to their 2010 lows (Chart 1, below). Will we see further losses?

The August USDA crop report raised the bushel-per-acre (bpa) yield to 167.4, up from last year’s 158.8 bpa yield. While that is substantially higher than the five-year average of 151.06, it is not necessarily representative of rapid technological advancement. Back in 2010-11 the bpa yield was 165.

In the other years the crop experienced either challenging planting or growing.

For that matter, the yield estimate was actually a bit of a disappointment as the average of analysts’ guesstimates was 170.5 bpa. Regardless, the market greeted the USDA estimate with a new low in price (Chart 2, below). Ever since, though, the market has traded sideways, indicating, perhaps, that the selling is done – for the moment anyway.

Another interesting wrinkle in the barrage of otherwise bearish supply-side news, which has not attracted much attention in the headlines, is that acreage may have been overstated. There is more than one US government agency that calculates acreage. Historically, the final numbers do not vary much from the accepted estimates that we see in the planting intentions report, which eventually become official USDA data. This year, however, the discrepancy is particularly large – the figure used in the crop report was the higher one – which leaves room for potential downward revisions to planted area. 

Among other large Northern Hemisphere producing countries, China will likely see a 1.5% downward revision to its crop because of drought. This should not affect global prices, however, because Chinese carryover stocks are ample – about 35% of usage – so they are unlikely to import more than the current estimate of 3 million tonnes.

The Ukraine is a significant exporter. Its crop fared better than originally expected when the conflict with Russia surfaced earlier this year. At 27 million tonnes, the crop is 4 million tonnes below 2013-14 output, still the second-highest crop on record.

Global ending stocks are estimated at 187 million tonnes, or 19.38% of consumption. That is a return to the early-2000s, pre-bull market levels. As such, we could see prices drift lower.

One of the variables that could halt the slide – as mentioned above – is the potential for a downward revision in U.S. acreage export forecast by 600,000 tonnes in the August crop report, to 43.2 million tonnes. But that is still a very conservative estimate when compared with last year’s sales of 48.8 million tonnes. It is far too early to draw any conclusions from early new-crop sales, which are typically scant in the corn market until the new marketing year begins on September 1. Stronger-than-expected foreign sales would certainly have a stabilizing effect on the market.

In conclusion, the bull market did its job. High prices have inspired production increases. After four seasons of either balanced or deficit production/consumption, the 2014-15 season will mark the second consecutive year of surpluses, leaving the overall outlook in the bearish camp. Still, with such steep losses in prices we do not see any obvious trading opportunities. Should you have been so fortunate as to be short, we would recommend placing buy stops at $3.85 per bushel, basis December, close only. Otherwise, remain sidelined. 

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