TWO weeks after the U.S. Department of Agriculture shocked the grain markets by reporting considerably more corn in storage than analysts had anticipated, traders are gearing up for the department's first estimates of supply and demand that incorporate the March 1 stocks data.
USDA will release the April "Crop Production" report and "World Agricultural Supply & Demand Estimates" (WASDE) on April 10, providing another clue as to how current prices are influencing feed grain demand and usage.
As discussed last week, USDA reported almost 400 million bu. more corn on hand as of March 1 than the trade had expected, sending the markets into a sharp price decline. This, surprisingly, is not out of the ordinary.
University of Illinois economist Darrel Good noted last week that 11 of the past 13 quarterly stocks estimates have provided enough of a deviation from expectations to generate large price movements.
In fact, according to USDA's own data, the quarterly stocks estimate has caused a price change greater than 50 cents/bu. in 11 of 22 quarters since September 2007. Based on the settlement price of the May corn contract on the Chicago Board of Trade, the March report caused a $1.05/bu. drop in price, nearly matching the $1.13/bu. jump in prices observed in March 2011.
The wide swing in prices following these major USDA reports is becoming something of a concern for the market.
"While it should be expected that the market will not always correctly anticipate USDA estimates, the recent pattern of large and seemingly alternating direction of the surprises in the quarterly corn stocks estimates is problematic," Good wrote in his analysis of USDA's March estimate. "One of the results is a pattern of feed and residual use of corn that varies considerably from quarter to quarter and from year to year, making it difficult to anticipate future feed and residual use."
That can lead to wide swings in projections of usage for the marketing year -- or estimates for the previous year, in the case of the September report, he explained. When the most recent report exceeded the average trade guess by roughly 370 million bu., it marked one of the largest disparities between USDA and the trade in 30 years.
The problem for the markets now is that the data don't quite add up. As Good observed, the slow rate of feed and residual use implied by the stocks number doesn't jive with current livestock inventories and production.
The corn figure, along with the extra 50 million bu. of soybean stocks indicated in the report, means the June stocks report will be tough to peg.
"With the large March 1 stocks estimates, the 'small crop, long tail' price pattern for corn and soybeans continues," Good noted. "While planting intentions for corn and soybeans revealed were near expectations, new-crop prices have also weakened as expectations for larger stocks at the end of the current marketing year provide some additional supplies for the next marketing year."
In fact, price changes in the first quarter of the year have already had some influence on planting intentions.
University of Illinois farm management specialist Gary Schnitkey examined returns to corn and soybean production that account for current prices and found that soybeans look more attractive to produce than they did a few months ago.
On Jan. 15, new-crop prices for cash corn were roughly $5.60/bu., falling to approximately $5.10 by April 2. For soybeans, prices had only fallen 30 cents, from $12.50 to $12.20/bu., meaning that price changes increased relative to soybean returns.
"For high-productivity farmland, Jan. 15 cash bids resulted in a $528-per-acre corn-after-corn return, compared to a $405-per-acre soybean-after-corn return, a difference of $123 per acre in favor of corn," Schnitkey wrote. "April 2 prices resulted in a $46-per-acre difference. Profitability differences between the two crops substantially narrowed from $123 per acre on Jan. 15 to $46 per acre on April 2."
The price also affects low-productivity land: There is actually now a projected $3-per-acre benefit to planting soybeans.
USDA's stocks report immediately locked old-crop corn prices down the 40-cent daily limit and led to a 12.6% drop in the May contract in just two sessions' time. On March 29, ahead of the report, May corn closed at $7.3525/bu., and by last Thursday, it settled at $6.30/bu.
Ethanol production data were mixed, with stocks growing 0.2% on the week despite production increasing roughly 2,000 barrels per day. Export data were neutral, with sales coming in at 13.9 million bu., up 20% from the previous week.
Some analysts contend that the rapid drop in prices could spur some additional export activity, ethanol production or feed sector demand, but in reality, many end users will wait to see how much further prices can fall. Traders will largely tread water, barring any major change in information, until the April 10 WASDE report.
Soybean prices fell alongside corn. Ahead of the stocks report, the May contract settled at $14.5375/bu., and last Thursday, it fell to $13.72 as USDA reported nearly 50 million bu. more soybeans on hand than traders had expected.
In addition to domestic supply and demand questions, the market will be watching the April 10 reports to see what USDA has to say about South American grain production. Some traders expect Argentina's corn and soybean production to be lowered slightly.
With the hundreds of millions of bushels implied in the March stocks report, USDA will almost certainly have to show larger ending stocks in the April WASDE.
Analytical firm Allendale, for example, now projects 2012-13 ending stocks to be 882 million bu., up from the 632 million USDA reported in the March WASDE.
For soybeans, Allendale pegged ending stocks at 139 million bu., up from USDA's 125 million guess last month.
With the stocks report out of the way, traders' attention will have to return to weather and planting prospects. While precipitation has helped areas of the eastern Corn Belt recover from last year's drought to some extent, many regions of the country are still as parched as can be.
Weather will be the real "X-factor" for the market again this year as USDA's planting intentions report and assumption of a return to trend-line yields suggest a bin-busting corn crop, which is exactly what was expected to happen this time last year.
Using a weather-adjusted trend, corn yield this year should hit 163.6 bu. per acre (Figure 1). Based on a five-year average harvest rate of 91% and planting intentions of 97.3 million acres, farmers could harvest a record 14.49 billion bu. of corn.
For soybeans, the weather-adjusted trend suggests a yield of 44.6 bu. per acre (Figure 2). Looking at planting intentions of 77.1 million acres and the 91% harvest rate, production could top 3.13 billion bu.
Any major weather hiccups could send prices widely careening in either direction; record-tight or near-record-tight stocks-to-use ratios will keep the market walking on the razor's edge through harvest.
New trading hours
April 7 marked the implementation of CME Group's new trading schedule, starting with the opening of the CME Globex session at 7 p.m. (CDT).
Under the new schedule, trade will open from Sunday to Friday from 7:00 p.m. to 7:45 a.m. (CDT), followed by a 45-minute pause in trading prior to the open of floor trading at 8:30 a.m. The day session will close at 1:15 p.m., with daily settlements based on market activity at or around 1:15 p.m.
The free-fall in corn and soybean prices continued to put pressure on several protein meal products, while reformulation has played quite a role in lowering prices for meat, bone and blood meals in recent weeks.
"A lot of us are putting on a good poker face," one merchandiser told Feedstuffs of the current dog-eat-dog market.
Access to export markets has kept many players from feeling like the sky is falling, however, as overseas markets pick up some of the "extra" domestic supply.
With additional ethanol plants coming back on line in recent weeks, additional production of distillers grains has provided some extra supply in that market as well.