Where Do Corn Prices Go From Here???
Oct 01, 2010
Well, I certainly predicted a wild ride...and that is exactly what we have had. Obviously yesterdays USDA report rocked the markets much harder than I personally had anticipated. I knew we would be heavily lower today after the USDA came out defending their numbers in such a bold fashion. Having been around grain trade most of my professional career, I can assure you there is no real concerted effort to segregate corn by into old crop or new crop piles for survey purposes. Most everyone I know simply reports what there grain balance sheet is on a specified survey date...period! Now the USDA may want to believe that all of their fancy forms and equations are being put to good use, and have worked to prevent co-mingling, but I strongly doubt it.
I know some traders who are viciously crying "foul" by the USDA, but personally I understand the number. I don't like the number, but I understand their reasoning. I think it will take until Jan before we see it all shake out. At that time we might see corn stocks come in several hundred million bushels below the average trade guess as it did back in 2007, validating both their 3rd and 4th quarter stocks reports.
Also you have to believe that by showing an extra 300 million bushels in this report they can justify cutting yields by about 3.7 bushels per acre in the October report without shocking the market. The reduction in yields will be off-set by the rise in ending stocks.
Regardless of what I believe or how I feel the funds have obviously gotten nervous and headed for the exit doors in large numbers. I have heard some heavy hitters like Goldman Sachs and a few of the other big players stepped in as buying on the break. Who knows if they are in it for the short rebound higher or looking to add more long positions. I would suggest the later as just three weeks ago Goldman released a detailed report and moved their Corn price objective closer to $6.
Understand the USDA number was much much larger than anyone was anticipating (300 million higher). In fact it showed our ending corn supplies to now be almost 20% higher than most analyst estimates. If you look at it as a % it is very significant. My argument still is of that 300 million bushel rise, 200-250 had to come from the new crop production. Production last year was so extremely delayed that there was absolutely no possibility of co-mingling. This year we had between 500-800 million bushels harvested by Sept 1st. I find it next to impossible to believe there was no co-mingling. Most in the know actually tell me that a majority of the new crop corn was being blended in with old crop stocks to make it look better.
Here is even a better one, if you take the Sept 1st stocks figure at face value, 4th quarter feed demand was stated at just above 500 million bushels, this down almost a whopping 25% from last year, and would now be the 2nd lowest on record since 1950. How could that have been the case? It is clear to me now that the USDA has had one heck of a time trying to figure out on feed usage. In the 1st quarter they had feed up 3% from last year. With the release of March 1 stocks, 2nd quarter feed usage it was down 14% from last year. They followed that up June 1st by telling us it was now up 36% from last year. Now we are way back down...are they serious. I thought their argument just 3 months ago was that the low test weight corn was forcing significantly higher livestock feeding...I wonder what the story is today???
I could continue to argue the fact until I was blue in the face, regardless the market has suffered a significant set-back.
The report has really hurt us short-term and certainly made a significant impact. To make it easy to understand, the USDA basically just added another 4 bushels per acre to the yield, by adding more than 300 million bushels to our stockpile. The problem now becomes if the USDA lowers our corn yield 2-3 bushels in next Friday's report we will still be above the 1 billion bushel level that everyone has been so worried about. The way it sits now we will only see historically tight supplies if the yield falls below 160 bushels per acre.
I certainly believe that is possible and in fact believe the yield realistically could be more like 150 bushels per acre. I am just not sure the USDA will let that happen. When the largest buyers of beans and corn are also the largest buyers of US Treasuries, it only reasons that by reducing the price they have to pay to feed their country the more money they will have available to purchase US Debt. We keep Bean prices under wraps and China has more money available to buy 30 Year Treasuries. I hate to think this way, but what can you use to explain numbers drastically changing like they have.
The markets have provide us with some fantastic opportunities, and we have managed to make some terrific cash sales for our clients along the way. We have also locked in a fantastic floor for our producers who continue to follow our hedge recommendations. I think spec traders can anticipate taking technical heat back into the $4.50-$4.25 range. We still believe there is tremendous value in corn long-term.
Anticipate another wild ride next week as all eyes fall upon Friday's USDA report. If you would like more information about our cash sales strategies or hedging programs please call our home office at (816) 322-9800.
Ethanol & Corn Prices
There is no debating that ethanol production has driven corn prices higher. There looks to be no slowing it down either. In a recent report released by the EIA it showed July US ethanol production up more than 3% from June's production levels, and easily setting a new monthly production record. We also set another new record, with average daily production coming in at 36 million gallons. How does all of this affect corn? You guessed it, a new record in total corn usage, the report showed the implied grind in July was over 400 million bushels. This information has some big traders worried that the USDA's 2009/10 total corn usage for ethanol maybe too low, even with the 35 million bushel increase that was added in early September. Do you realize that through July, the total amount of corn used for ethanol has been 4.149 billion bushels, up almost 25% from last year.
Many traders have been aware of the production increases, but this is something I hadn't realized, at least to that extent. Despite the record production in July, our monthly ethanol stocks have actually declined for the second consecutive month. We now have just under 750 million gallons (basically 20 days of usage), our lowest absolute stocks level since December 2009. We basically have dropped 10% in our total stocks level in just the last two months despite the record production. This means demand has exceeded production in both of the past two months. From what I can gather our annualized ethanol demand has grown to around 13.6 billion gallons, and our annualized production is estimated to be around 13.1 billion. Don't get crazily excited and race out and buy more corn just yet. I know for a fact that demand during the past couple of weeks has slowed due to ethanol's sharp price rise relative to gasoline. Corn was racing higher and crude was falling lower. You do have to take notice of this information and realize that at some price level corn has significant support from the explosive demand of Ethanol. If crude starts to trade significantly higher, ethanol demand could really push corn prices.
I believe in the past there was still a lot of apprehension about ethanol usage. After seeing these type of demand numbers you have to believe ethanol is being more widely accepted and used in more applications.
On The Global Front
More rains in Russia are encouraging farmers to plant more winter wheat. I also think some of the supply fears in wheat have eased a little bit as importers have gotten a better grasp of how much grain is available. Recent rains in Russia are raising hopes the country will harvest a decent winter wheat crop next year. To be more specific I have heard their plantings are up almost 20% from last week. From what I hear the weather is looking much better throughout Russia. The problem is they are getting down to the wire in regards to the most optimal time to plant. The Ukraine looks to be right on target for winter grain plantings, and have had no significant delays. The weather has shaped up nicely in India as well, in fact I have heard monsoon rainfall may now be the best since 2007. India is projecting another record crop for rice, corn, cotton and oilseeds Keep your eye on India to step into the exporting game on more news of record yields, look for them to test the markets with excess soy meal and corn.
Wheat Planting Here In The US
Wheat planting here in the US heading into this week is thought to be around 33% completed, that is about 5% below the average for this time of year. From what I am told most all of the eastern Midwest still needs some significant rain to make it all happen.
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