The Jan. 11 USDA Grain Stocks report was a market mover and it might keep traders guessing into June. The last time we were threatened like this with unmanageable corn stock levels was 1995/96.
Price has been doing its job. Estimates going into the report had exports down 50%, ethanol down 500 million bushels, and feed and residual (F&R) down 400 million bushels. The first trading day of 2013 began with a daily key reversal down in corn, filling the July 5 up-gap and erasing the post-July drought rally.
"Unless I see a fundamental technical reason to do otherwise, I will have converted the February calls into long March corn futures."
Report Shock. The report did not reflect increased drought damage, but instead raised total production by 55 million bushels (yield was increased 1 bu. per acre, while harvested acres were lowered by 300,000). The first shock was Dec. 1 stocks 207 million bushels below average estimates; 100 million bushels below my estimate. While producing more, the drop implies an increase of 300 million bushels in F&R. September, October and November cash corn was likely $7.50 to $8, which begs the question: If livestock feeders didn’t reduce usage at that price, at what price will they?
The report shows a half-quarter of usage was already behind us before we knew feed demand was not being reduced. USDA also increased sorghum and barley feed demand. In order to keep corn ending stocks for 2012/13 at pipeline levels, the only recourse was to reduce exports another 200 million bushels, putting even more pressure on South America for a good crop.
I have two theories: (1) Increased demand in July and August drew forward more of the new-crop 2012 usage, skewing Dec. 1 stocks lower than guessed. (2) End users became more astute risk managers and booked enough usage (cash/futures) to take them into March or beyond. I suspect both are true. Speculation as such won’t be quantified until the release of the March 30 stocks report. This uncertainty should work to favor old-crop (March-July) corn prices compared to December.
If the good news was F&R (wheat also had good price news), the bad news was the "expected" reduced corn export demand, which likely won’t come back soon. The "ugly" is a record South American soybean crop. Protein supply might finally equal or exceed global demand, meaning we will need a good biodiesel program to keep soybeans above $11 next fall.
Even with a yield of 10 to 15 bu. below the trend line at 99 million–plus acres, corn prices don’t look good. Less winter wheat means those acres will shift to soybeans, sorghum or corn. The lost export demand of more than a billion bushels to our competitors won’t easily return. Buying that demand back will require being the lowest priced seller, not the cheapest producer. Cost of production is local; selling retail is global.
What to Do. As a proponent of flexible marketing and seeing the demand reduction unfold since Sept. 1, I recommended being 100% sold for 2012 and 75% to 85% for 2013 as time, price and information unfolds. However, after such a drop in the market, upside call protection through short-dated February $7 corn call options were purchased days before the report on 25% of 2012 and 2013 crops and for end-user coverage. Unless I see a fundamental technical reason to do
otherwise, I will have converted the February calls into long March corn futures. While the weekly key reversal higher posted Jan. 11 in March futures looms large, it didn’t occur in July futures. This suggests price rationing the cash market’s job with March and May gain on deferred. The market’s job is to make sure export and ethanol demand diminishes further while preventing any increase in feed usage. Given the supply/demand implications for 2013 crops, I will continue with
"flexible" coverage while watching the weather.
Jerry Gulke farms in Illinois and North Dakota and is president of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. Gulke Group recently published Technical Analysis: Fundamentally Easy. For information, send an e-mail to email@example.com or call (815) 520-4227.
- February 2013