Smaller Corn Crop Drives Rally—Within Limits

August 12, 2011 03:38 AM
 
USDA fields

USDA hit the corn market with bullish news in its Aug. 11 Crop Production report, which cut this year's estimated average yield 5.7 bu. to 153 bu./acre. Department analysts pared their demand estimates to balance the smaller crop, but they still projected next summer's ending stocks at a very tight 5.4 percent of use.

Corn futures through July 2012 quickly hit the 30-cent limit up, but they backed off a few cents and traded through the day to settle with gains of about 25 cents.
 
Futures already have been strong and the outlook is uncertain for volatile outside markets, so some analysts responded cautiously to the USDA reports.
 
"To me, it looks like a situation where you get early strength, and then we'll have to see if we can maintain this strength by the end of the day," said Allendale Inc. President and CEO Paul Georgy before markets opened. "I'm very concerned about the outside markets." Now that August crop production numbers are out and the market knows ending stocks will be tight, bullish news beyond weather developments may be scarce.
 
USDA projected a corn crop of 12.914 billion bushels based on the average yield of 153 bu./acre. Analysts on average had expected USDA to report a crop of 13.08 billion bushels from a yield of just over 155 bu./acre. USDA's yield projection may be on target for current conditions, said some traders, but USDA often makes more modest adjustments in crop projections.
 

Tight Carryover Projected

"Quite a surprise to the corn market," said Joe Barker, Kansas City branch manger for Country Hedging, in a market commentary. "That takes the new-crop ending stocks down to 714 million bushels."
 
The projected carryover for 2011-12 is tighter than the 740 million bushels the trade had expected. It's also down from last month's USDA projection of 870 million bushels.
 
Carryover estimates are down even though USDA reduced 2011-12 feed and residual demand to 4.9 billion bushels. That's off 150 million from last month and down 100 million from 2010-11.
 

Old-Crop Basis off in Iowa

Hot weather caused some ethanol plant production problems and reduced corn demand for ethanol plants this summer, said Randy Dunn, grain marketing vice president at First Cooperative Association based in Cherokee, Iowa.
 
Nationally, the Energy Information Administration reported four-week average ethanol production trended down from early June through July. For old-crop corn, USDA reduced its ethanol demand estimate by 30 million bushels to 5.02 billion. Projected 2011-12 ethanol use of 5.1 billion bushels is off 50 million bushels from last month but still up 100 million from 2010-11.
 
Dunn thinks corn futures prices in the $7 to $7.50 range may be high enough to limit demand. Feed demand in northwest Iowa has already shifted from corn toward ethanol co-products. He says exports would be the first to decline, partly because of increased international supplies of wheat from Russia and Australia.
 

Export Demand Shifting

In its new supply-demand estimates, USDA projects global wheat feeding this year at 127.9 million metric tons, up about 10 percent from each of the past two years. Even in the United States, USDA has pushed its wheat feeding estimate to 240 million bushels in 2011-12, up from 129 million last year and 150 million two years ago.
 
USDA analysts project that corn exports will fall to 1.75 billion bushels in 2011-12, down from last month's projection of 1.9 billion. Exports reached an estimated 1.825 billion bushels in 2010-11 and 1.98 billion the prior year.
 
"Had they not cut exports by 150 million bushels, you would have had ending stocks of 564 mil bu.," said Country Hedging's Barker.
 
Old-crop corn basis in northwest Iowa has softened in the past couple of weeks on lighter ethanol plant demand and prospects for early harvest because of hot weather. When asked about new-crop basis, Dunn said, "I think people are kind of waiting to get a little better handle on the size of the new crop before they go either direction."
 
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Find the report data and expert analysis of the Aug. 11 reports.

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