Little Margin for Error

August 30, 2011 08:49 PM
Little Margin for Error

Domestic, world users battle for every bushel of corn

USDA’s new-crop corn use projections were about as tight as they could get leading up to the July Supply and Demand Estimates report. Total use is projected to rise by only 195 million bushels from 2010/11, with corn-for-ethanol accounting for 100 million bushels of that increase.

With old-crop feed and residual use sliced to an ultra-tight 5 billion bushels, the projected 50-million-bushel increase for 2011/12 just seems silly. While USDA doesn’t reveal how much of that category is attributable to residual use, it’s thought to be close to "zeroed out."

That leaves exports as the only category for significant cuts. Slashing exports seems unlikely, though, given China’s strong appetite for corn as it tries to rebuild its diminished stockpiles.

As a result, while there’s very little margin for error when it comes to this year’s crop, there is also very little fat left to trim from demand projections. Price action will remain volatile through the end of the growing season as the downtrend in corn yields through the 2010/11 harvest remains fresh in traders’ minds. The risk of a similar downtrend this year means that end users will aggressively buy price breaks. On the bright side, corn users seemed willing to accept upside price risk when futures reached $7.50 this summer. That price level flatlined demand as feed rations took on more wheat and corn importers kept their wallets in their pockets to wait for better buying opportunities.

A move higher than $7.50 in a 2011 crop corn futures contract will signal that conditions have changed once again. New supplies will not keep pace with use, threatening to pull Sept. 1, 2012, corn stocks below pipeline levels.

The situation is not much different in the soybean market, although soybean traders are more accustomed to dealing with snug supplies. That soothes some of the unease, but not completely. There just isn’t a lot of room for downward adjustment to the 2011/12 soybean usage categories.
USDA has already cut projected use, most notably exports, which it projects to decline by 25 million bushels from 2010/11. While increased South American supplies mean more competition for the U.S., Chinese soybean imports are expected to rise by up to 10% in 2011/12 after just a modest increase this year. Even a small reduction in exports seems like a stretch.

Crush, while projected to be up a modest 5 million bushels from 2010/11, is down significantly from two years ago. That suggests there isn’t a lot of room for that category to decline sharply. Of course, USDA still has 25 million bushels of residual "use" to play with in the next 12 months.
Recently, the agency has shown that is the "leveling" category.

Wheat is a different story. Supplies, while tightening, are still plentiful and demand is expected to decline. Exports will be hit the hardest. With Russia and Ukraine returning to the export business and Australia’s production expected to rebound sharply, demand for U.S. wheat will suffer, although demand for U.S. high-protein wheat will be strong. USDA predicts a 10.6% decline in wheat shipments for 2011/12 to reflect the competition. Unfortunately, a sharp increase in feed wheat use won’t come close to offsetting the drop in exports on a bushel-for-bushel basis.

global stocks




Stocks-to-Use Ratio Tells the Story

The truest reflection of the supply-and-demand situation is the stocks-to-use ratio. For 2010/11, USDA estimates corn stocks to use at a tight 6.6%. That’s projected to tighten to 6.4% in 2011/12. But tight stocks to use isn’t limited to the U.S. The world picture is much the same, with global corn stocks to use declining to 14.3% in 2010/11 and projected to tighten even further (13.2%) in 2011/12. That’s despite an expected 52-million-metric-ton rise in corn production worldwide. Simply put, supply growth can’t keep pace with the global rise in corn demand.

Soybean stocks to use are also expected to be tight in the U.S., at 5.4% in 2011/12, but the global picture is different. At a projected 23.6%, global soybean stocks to use for 2011/12 are tighter, but not tight. Global soybean demand is mildly outpacing supplies, but not nearly at the same rate that is currently seen with corn.

Wheat supplies as a percentage of use are comfortable for 2011/12, both domestically and globally. While both stocks-to-use ratios are projected to tighten from 2010/11, they will be far from "tight."

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