Sep 22, 2014

PFA Pioneer Blog

RSS By: Chip Flory, Pro Farmer

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Residual corn use blurs corn supply.

May 11, 2012

Pro Farmer Extra

- From the Editors of Pro Farmer newsletter

Corn Residual Use Blurs the Corn Supply Picture


May 11, 2012


In this week's Pro Farmer newsletter, we make the case for a shift in corn's marketing year from the current Sept.-Aug. to an Aug.-July calendar. The reason is really pretty simple. The line between old- and new-crop supplies has been grayed by early-harvested corn. By moving the start of the marketing year to August 1, the line between the two crop years would be sharpened. In the commodity world, a gray line creates confusion; a sharp line would help bring back the usefulness of futures as a hedging tool.


And we are concerned corn futures have lost their effectiveness as a hedging tool. Old-crop corn basis is trading well above historical norms and basis is likely to remain exceptionally strong as the cash market attempts to ration what are tight old-crop corn supplies. Unless futures and the cash market converge back to historical norms, it becomes very difficult to offset risk with hedges in futures. Don't believe that? Ask guys that have tried to hedge wheat in recent years. Up until this year, basis had been so week (a perfect scenario for hedging) that short futures (hedges or HTAs) was about the only way to price the crop. The situation in corn is just the opposite, but strong basis right removes the need and opportunity to offset risk with futures. That's because is a crop is priced with a short futures position (a hedge), basis is still "open." If basis softens, that basis weakness comes right off the final selling price.


Also in Pro Farmer newsletter this week, we try to explain why USDA cut feed & residual use 50 million bu. to raise carryover by that amount in the May 10 Supply & Demand (S&D) Report. In reality, USDA didn't cut expected feed use... it cut use in the residual component of the feed & residual category. In fact, we argue USDA is working with a negative residual for corn right now. Negative residual use actually adds to total supply to help hold up carryover. The most clear example of a negative residual is was in soybean's 2007-08 marketing year. In the March 2008 S&D Report, USDA estimated soybean residual use at 79 million bushels. In April, residual use was cut to 2 million bushels. That added 77 million bu. to the soybean supply. In July, USDA estimated soybean residual use at -35 million bu. -- and a negative residual actually adds to the total supply for the marketing year!


The negative residual was finally resolved (at least nearly resolved) in the October 2008 S&D Report -- that's after the end of the 2007-08 marketing year. It was resolved when NASS revealed Sept. 1 soybean stocks of 205 million bu. and added a half bushel to the 2007 national average corn yield and 91 million bu. to the 2007 crop. That's right... USDA added nearly 100 million bu. to the 2007 crop while you were harvesting the 2008 soybean crop. It might seem crazy, but it was done because old-crop carryover has to be squared to the September 1 stocks data.


And we've seen similar happenings in corn the past two years. September 1, 2010, corn stocks were about 300 million bu. above USDA's September carryover estimate; September 1, 2011, corn stocks were about 140 million bu. above USDA's September carryover. The supply-side surprises are all part of erasing that year's negative residual.


More evidence USDA is likely working with a negative residual in the 2011-12 feed & residual estimate. USDA's current marketing year estimate of feed & residual use is 4.55 billion bushels. For next year, USDA expects corn feed and residual use to rise 900 million bu., to 5.45 billion bushels. That estimate comes from the same agency that projects 2013 total meat production (beef, pork and poultry) will be up just 1% from this year. Either we're going to experience a significant fall-off in feeding efficiency, or USDA will be erasing a negative residual in the 2011-12 marketing year with another supply-side surprise in the September 1, 2012, stocks report.

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