Pre-report guessing game!
Jun 20, 2008
We are now entering the period of pre-report guessing! What will the USDA June Actual Acreage report say? How much of the reduced plantings due to poor planting conditions in the Midwest will they reflect? Will we see double crop corn in the south behind wheat acres? Are there any increased acres in non-traditional corn production regions? Since the surveys were done before the floods, the baseline number will not reflect the flood damage. USDA is sending out surveys now about flood damage that will be reflected in the August USDA Supply and Demand report.
So what are the acres and yield? Right now the market is starting to feel like a dog chasing it’s tail. It’s exerting a lot of energy but not getting anywhere. Concern is growing that the report due out on the 30th of the month will not be a bullish event. As I’ve learned over the years a bull needs to be fed, so I’m not going to be surprised to see a correction in July. Seasonally, it’s suggested and I would not be surprised to see a lot of producers selling during this time because of the fear we have over done the rally.
The problem is the market is currently in a once in a lifetime event. We are now seeing a historical 500 year flood intersect with historic strong demand and growth world-wide. The end result I fear is a slower rationing of demand than we have historically experienced.
After everything balances out I believe we will see planted acres some where between 84 million acres on the low side to 86.5 million acres on the high side. The big bull will see confirmation of flooded acres which have the potential to exceed 4 million. Let’s say we split the numbers and suggest a number in the June report at 85 million acres and reduce another 4 million to take us down to 81 million acres planted. This is where things get exciting.
You then must assume at least 93% is harvested, which is a historical number, which reduces the acres down to 75.33 million acres. The next big question, what is U.S. yield? I believe you must assume a lower yield at least to 145 bushels per acre. So this implies a total production at 10.922 billion bushels. In the last Supply and Demand report, USDA estimated usage at 12.5 billion bushels. So if we produce 10.922 billion bushels and use 12.5 billion, you are using 1.578 billion bushels more than you produce. We have 1.433 billion bushel in carryover status which implies a negative carryover of 147 million bushels. This simply can’t happen! The market will not allow carryover to remain long below 450 million bushel. The implication is clear, currently we are setting up a situation this winter and next year where 597 million bushel of usage must be reduced from the already lowered numbers in June.
How high will prices have to go for a lifetime pork or dairy operation to quit, ethanol producers to stop production or an exporter to stop buying? These are all difficult questions. Granted $8 corn has done some of this but I really don’t believe it’s accomplished its goal of rationing usage. This event is still in front of us.
The problem is a bull needs to be fed every day and we are now entering a period between July and September where the crops are going to look good from the field. The maximum acres will have been lost but no final confirmation until January. All the wet spots will be covered up. My expectation continues to be that the market is going to trade sideways to lower on profit taking but I would find it very difficult to argue the market will close below the long term 21-day moving averages or the 45 degree uptrending support line off the major rally.
Conclusion: If you have forward sold inventory, you must be looking at defending your upside risk exposure between now and early August. Second, because of my concern for a major price rallying event I believe you must be concerned about your basis exposure on all futures to arrive contracts. I believe you must get these locked up now before they get worse.
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