U.S. grain markets are now within striking distance of effectively acquiring enough credible supply-side information which will influence price behavior over the course of 3 consecutive months. USDA’s release of the Grain Stocks and Small Grain Summary reports on September 28th has altered the price possibilities for corn, soybeans, and wheat going forward. It is within the corn market that the greatest fundamental and attitudinal shift has occurred.
It is now well known, that 4th quarter demand in corn was substantially greater than trade expectations. Yet, the unexpectedly large implied Feed & Residual component in corn was coupled with a similarly surprising Feed & Residual off-take in wheat in the 4th Quarter. That revelation in wheat serves as a principal supportive validation for the implied feed consumption of corn detailed for the 4th Quarter. The strong wheat feeding should give corn demand naysayers pause.
It was the corn stocks number received the top-fold and flashing marque headlines. And for altogether good and justified reason:
1) The corn stocks numbers out-sized magnitude of deviation from trade expectations.
2) Corn’s pre-eminent role in both absolute crop size and demand.
Both in hindsight and moving forward - it is going to be important to keep in mind, that there was a swift ground swell of trade skepticism following the Grain Stocks implied 4th Quarter Feed/Residual number in corn. The June-August corn consumption took into account what was likely a record available new crop supply – exceeding 1 Bil Bu - based on the 2012 harvest pace. Leading into the Grain Stocks report it was a situation responsible for near universal widespread trade uncertainty about the impact of intermingling of crop year supplies. And the focus was the distorting effect it could have on implied 4th Quarter Feed/Residual use.
So, the Grain Stocks report net attitudinal effect on the trades “intermingling” concerns and the validity of implied Feed/Residual use hasn’t been put to rest, but rather magnified. Be that as it may, the bottom-line here is that any reconciliation/ validation on stock levels and pace of consumption in the Feed & Residual category won’t be presented until mid-January 2013, That is when the 2012/13 Grain Stocks 1st Quarter (Sept-Nov) report is released. Coincidentally, and with no small dash of irony, this whole crop size/usage argument will have once again come full circle. The Annual (Final 2012) Crop Production report will be released at the same date and time. However, until then - the numbers stand as stated.
A secondary, but important nevertheless , element at work in the precipitous drop in 2011/12 marketing year corn stocks levels is inter-connected (presumably), to some unquantifiable extent, with USDA reducing the 2011 corn crop size. Essentially, USDA’s operational corn supply baseline is the common thread running through and stitching together assorted crop reports. And it has been in place since the Annual (Final 2011) Crop Production report of January, 12, 2012. That final number apparently was to have been found wanting. In other words, there is an argument advanced that there was some nipping and tucking of what is now old crop corn production.
Any statistical shortfall from 2011 corn production was filled in with some of the early harvested 2012 corn supply. Had additional bushels not been added to the 2011/12 old-crop end of the year supply, final 2011/12 end-stock levels would have more than likely fallen into the 600 Mil Bu “pipeline” range. That is an argument being advanced with the “proof” derived via an ad hoc mix of deductive reasoning, counter-intuitive observation and purely subjective judgment. It might be added that it also falls within USDA’s statistical margin of error. When you’re trying to get your arms around the production potential of a seasonal U.S. corn plant population that winds well upwards of 1.5 trillion plants it’s a tad challenging. I believe USDA does an admirable job given the extraordinary magnitude and complexity of the challenges they confront.
Now what compelling statistical evidence existed to induce such a presumed downward adjustment is unknown. It is important to keep in mind here that despite any internal recalibration of USDA’s 2011/12 corn supply baseline, it does not alter by a single iota the core challenge the numbers present - the market has been re-directed with the paramount task of ensuring corn demand is rationed. The mechanism of which is elevated price levels. Moreover, at this juncture not only is there an evident need for price to ration demand, but the necessity has exponentially increased. Though the time-frame in which to accomplish the job is now shorter, it is likely to be accomplished sooner, rather than later.
It is also worth noting, that during years of tight corn stocks, sorghum assumes increased importance as a supplementary source of feed stock. Despite larger sorghum production in 2012, that supply will not provide any meaningful relief to the overall level of demand rationing required. In the Grain Stocks report USDA trimmed end-stock levels 4 Mil Bu to 23 Mil Bu. As with corn, the overall sorghum S&D balance sheet remains tight as a drum.
Closure on corn supply for the 2012/13 marketing year, for all intents and purposes, will be had with the USDA/NASS release of the Crop Production report on Thursday, October 11, 2012. Significant wildcards will be dealt on the supply-side of the table as USDA updates planted and harvested acreage and tweaks yield, as well. Taken together, the projected size of the corn crop is due to change. Filtering through the variables, USDA has had a much better handle on the size of the crop than they’ve been credited.
The S&D profile for corn detailed in the October WASDE report also released on October 11th will incorporate the new 998 Mil Bu “Beginning Stocks” carry-in. The idea that the “wildcards” on the supply-side will be flipped bearish may prove to be as misplaced as that of the trades concern about the negative impact of the intermingling of separate crop years.
For producer’s still retaining ownership on 2012 corn production, known fundamentals should lift front-month corn futures – either December or March contracts - into the vicinity of $8/Bu. Additional upside potential exists if a tenuous and dynamic world wheat S&D profile is further animated by either man or naturally created supply crimps. In the near-term, the market has been supplied with enough price constructive input to keep the bears at bay. That is a situation that holds more potential than not of persisting past the October 11th USDA crop reports.