Stocks surprise markets again

Stocks surprise markets again

- USDA corn ending stocks 60m bu. below trade expectations. - Lower feed use partially offset by stronger ethanol demand. - Global end

DOMESTIC grain ending stocks remain very tight despite the fact that the U.S. Department of Agriculture shocked the market last month with a quarterly corn stocks figure that was far bigger than traders had anticipated.

Factoring that into the latest "World Agricultural Supply & Demand Estimates" (WASDE) report released April 10, USDA reported larger ending stocks compared with the previous month but still smaller than the trade had expected after the March surprise.

At 757 million bu. (Tables), the corn ending stocks figure still only covers somewhere around 55 days of domestic use, one of the smallest supplies since the mid-1970s. In fact, the estimate is one-third smaller than 2010-11 domestic ending stocks -- a significant drop in two growing seasons.

For soybeans, USDA likewise gave the market something of a surprise by pegging ending stocks at 125 million bu., smaller than the average trade guess of 136 million. Wheat was the only major crop for which USDA reported larger domestic ending stocks than the average trade estimate.

Trade expectations changed considerably following the quarterly stocks report in March, which found nearly 400 million bu. of additional corn in storage as of March 1. Traders assumed that WASDE would show much larger corn ending stocks based on that stocks figure, so the increase of "only" 125 million bu. was seen as somewhat bullish given pre-report guesses of as many as 300 million.

Digging into the corn balance sheet, USDA tightened its estimate of feed and residual use by 150 million bu. and lowered exports by 25 million, but the agency did add 50 million bu. to its estimate of corn for ethanol use.

"Larger-than-expected March 1 corn supplies, lower corn prices and favorable margins for producing and blending ethanol limit the expected year-to-year decline in ethanol production during the second half of the marketing year," the WASDE report explains.

Corn price projections were lowered 20 cents at the midpoint based on the larger supply on hand and now range from $6.60 to $7.10/bu.

The soybean balance sheet put the domestic crush up 20 million bu. based on strong soybean meal exports during the first half of the marketing year (through February). USDA raised its estimate for soybean exports 5 million bu. due to continued strength in overseas demand as Brazil struggles to get its ample supplies to port.

In fact, Brazil came under fire from its own farm sector last week as reports surfaced that the government had imported corn from Argentina due to the logistical chaos.

Drought in northeastern Brazil shriveled the feed supplies available for the region's livestock sector, and the government determined that with most grain haulers tied up moving soybeans, importing the grain was the only solution despite abundant supplies in the states of Goias, Mato Grosso and Rondonia.

Brazil's inability to efficiently move soybean supplies to port underscores a long-standing assumption that infrastructure is perhaps the single largest hindrance to the country's domination in the global corn and soybean trade.

The U.S. government is facing its own crisis of confidence, however, related to the shocking March grain stocks report. While it has become increasingly fashionable to second-guess USDA's crop reports in recent years, criticism reached a fevered pitch in the two weeks following issuance of the quarterly stocks report because it showed one of the largest differences between USDA and the average trade guess in nearly 30 years.

USDA director of statistics Joe Prusacki was quoted last week as suggesting that farmers' ability to accurately estimate grain in storage could be part of the problem. On-farm storage capacity is now some 3 billion bu. larger than just a decade ago, meaning larger and larger volumes of grain are stored privately.

Reuters reported that Prusacki said the government has a firm handle on the volume of corn stored by ethanol plants but relies on farmers to gauge the volume of corn in on-farm storage. USDA's next quarterly stocks estimate will be released June 28, while WASDE will be updated May 10.

 

Market recap

By and large, traders spent the week preparing for, and responding to, WASDE. Corn and soybean prices moved higher for two sessions heading into the report as traders began to think that they had oversold the market.

Following the April 10 report, corn closed higher for two straight sessions, while soybeans split the difference. The market saw the USDA data and ethanol production volumes as supportive to corn and more neutral for soybeans.

The basic dynamics of the market haven't changed that much: If U.S. production returns to trend-line yields with a "normal" growing season, prices will come down as supplies increase. However, if Mother Nature pushes yields below the trend for a fourth consecutive season, prices are likely to remain at current levels or perhaps appreciate further.

Ohio State University agricultural economist Carl Zulauf told Feedstuffs last week that it seems likely that the market has found the high end of the price range for the "new era" of grain marketing. Prices above $7.50/bu. for corn and $15.00/bu. for soybeans appear to be unsustainable because demand contracts at those levels.

What remains a mystery is the low end of the price range for the post-2006 period, when accelerating demand from the biofuel and export sectors began pushing prices to unprecedented levels.

Zulauf concurred that weather conditions during this growing season have the market looking at two basic possibilities: stocks remaining at historically low levels or production returning to potentially record-breaking levels.

Concerns over drought continue to linger. The National Oceanic & Atmospheric Administration reported that the nation's winter season was warmer and wetter than the 20th century average. The December-to-February period was the 20th-warmest winter on record, and despite precipitation that eased drought conditions in the eastern Corn Belt, roughly half of the country is still gripped by dryness heading into planting season.

While U.S. corn and soybean exports have lagged in recent weeks due to higher prices, private exporters last week reported an unusually large sale -- 360,000 metric tons -- of soft red winter wheat to China. Wheat has become much more competitive on the global market in recent weeks as prices have made it more attractive than corn.

CME Group last week reported that it set a new daily volume record for its short-dated new-crop corn options of 7,733 contracts on April 8, surpassing the previous record set Jan. 4.

Combined open interest in the short-dated corn and soybean options surpassed 100,000 contracts for the first time on April 8. The products were first traded in 2012.

 

Ingredient watch

Most ingredients continued to track the broader movements in corn and soybean prices, which led many prices lower. Prices for animal proteins, as a category, faltered last week, with one merchandiser observing that rendered proteins were simply overvalued for too long.

Demand for meat and bone meal on the export market has remained relatively decent, providing some support as domestic reformulation leaves more product available.

Feather meal is "in trouble," according to one source, who noted that many customers seem to have lost their appetite for the product at current price levels.

The pet food market's demand for poultry byproduct meal looks "iffy," and aquaculture demand has been unseasonably sluggish.

The bottom line for many marketers is that prices appear likely to remain weak for the foreseeable future, leading one marketer to quip, "Have you hugged your nutritionist lately?"

Editor's Note: Zulauf discussed the grain markets and its comparisons to the 1970s for a "Feedstuffs In Focus" podcast at Feedstuffs.com.

 

1. Crop ending stocks for 2012, million bu.

 

April 10

Avg.

Range

March

 

USDA

trade

of analysts

USDA

 

est.

guess

estimates

est.

Corn

757

812

625-925

632

Soybeans

125

136

107-160

125

Wheat

731

727

700-755

716

 

2. World ending stocks for 2012, million mt

 

April 10

Avg.

Range

March

 

USDA

trade

of analysts

USDA

 

est.

guess

estimates

est.

Corn

125

119

108-125

117

Soybeans

63

60

57-61

60

Wheat

182

179

177-180

178

 

3. World production, mmt

 

USDA

USDA

 

April 10

March

 

est.

est.

Corn

 

 

Argentina

27

27

Brazil

74

73

China

208

208

South Africa

13

13

Former Soviet Union

32

32

Ukraine

21

21

Soybeans

 

 

Argentina

52

52

Brazil

84

84

Wheat

 

 

Argentina

11

11

Australia

22

22

Canada

27

27

European Union

132

132

India

95

95

Former Soviet Union

77

77

Russia

38

38

Kazakhstan

10

10

Ukraine

16

16

Sources for Tables 2 and 3: USDA, Reuters.

 

Volume:85 Issue:15

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