After the October USDA report, I wasn’t surprised by the 2.5 bu. per acre increase in soybean yield (to 37.8 bu. per acre), but I thought the corn yield (122 bu. per acre) would be higher. My corn yields, like yours, ranged from zero to above average (which was the case for one normally wet field that was planted late). The soybean crop did what it has been known to do and responded to favorable August weather with better yields. Traders expect yields to continue to improve until the January report; however, history suggests we are within 98% of the final count.
The October report did solidify the supply side, so now my focus is on demand, or the lack thereof.
"At what price will the
Ukraine, Argentina or
Brazil say uncle and cut
back should we produce
too much one year?"
Collapsing Needs. With almost 2 billion bushels less corn on hand compared with last year and 3 billion less than estimated in June, sufficiently reducing demand won’t be easy. There are some
developments in the works that could haunt us for a while—maybe a long while. USDA expects exports to fall 400 million bushels from last year’s 1.543 billion bushel mark. Another 150 million to 200 million bushel blow isn’t out of the question, bringing exports to the lowest level in decades. Nearly 500 million bushels of lost demand is coming from Japan and South Korea, which have collectively purchased nearly 1 billion bushels in the past. That lost demand is being made up by South America and the Ukraine. In fact, we might import 125 million bushels from our competitors this year. Realizing that a free market now works both ways is something we might be
ill-prepared to accept.
Corn used for ethanol will likely be 550 million bushels less than last year.
Feed usage is a moving target because we don’t have to report what we use every week, unlike exports and ethanol. Feed usage is calculated from animals on feed, using realistic feeding rates. While it’s scientific, when disappearance is compared quarterly, the difference between what is and what was expected is dumped into residual usage, or into feed and residual. I think of it like my checking account not balancing until I realize I forgot to log a check. The missing check is my residual usage until I get another statement that corrects the error.
The quarterly stocks reports reconciles expectations. Analysts, such as Informa Economics, estimate and track usage, and Gulke Group pays for the advice. So while I can sense that end users will react to high corn prices and tight stocks, it is our intangible psychological reaction to events that really makes life interesting. In 1995/96, I could quantify that if we didn’t quickly cut demand significantly, we would virtually run out of supplies before harvest. The market saw an impossible task gradually unfold until prices reached 125% of previous highs, moving to more than $5.25.
Usage Versus Price. If we use more corn than what is perceived, then $7.50 corn futures weren’t high enough to sufficiently ration. Conversely, if we find more stocks on hand with each quarterly stocks report (Jan. 11, March 28 and June 28), then $7 to $8 cash corn did the job of rationing and the proverbial $10 corn price is a figment of traders’ imagination.
Less production and total usage means there’s less need for pipeline stocks at 1 billion bushels. We will get the job done perhaps with 700 million bushels, but we can’t accurately quantify the efficiency of our price discovery system until more information is reported.
What concerns me is what we will have to do to gain back the 1 billion bushels of exports needed to absorb a crop with a normal 162 bu. per acre yield, now that we can plant 100 million acres of corn. At what price will the Ukraine, Argentina or Brazil say uncle and cut back should we produce too much one year? We know it will happen, but when? Timing is everything.
- November 2012