How Strong is Feed Demand for Corn?
Mar 25, 2014
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Happy National Ag Day! We should take a moment to celebrate such a vital part of the American economy and culture. Maybe it should be National Ag Week.
As we get ready for what could be one of the biggest reports of the year for grains we wanted to look at a key component of the corn balance sheet. In the last 6 months the USDA has sharply increased corn demand which has lowered ending stock estimates dramatically. One of the key increases in demand that the USDA sees is feed demand, but is this large increase justified?
Compared to last year the USDA sees a 965 million bushel increase in feed demand. In large part this is due to lower con prices and an abundant corn supply. At the same time the USDA is expecting a year over year decrease in wheat demand for feed and residual of 138 million bushels. This alone accounts for some of the increase in corn demand for feed and is very likely accurate considering the price relationship of corn and wheat. Last year when corn stocks were tight and prices were high it made sense to feed more wheat and this year the shift should be back to corn. At the high end this could account for an additional 150-250 million bushels of corn demand over last year.
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Other factors contribute to a higher corn demand for feed as well. It has been an especially harsh winter and this means we need to feed more to keep weight on animals. And, average animal weights are higher then last years so there is more corn being fed. There is also a dryness issue in the South Western plains and this also increases corn demand for feed as there is less usable pasture. So, both of these factors do increase corn demand for feed.
One thing that has not changed much from last year to the current year is the number of animals on feed. Last Friday's USDA Cattle on Feed report showed that as of March 1st 2013 we had 10.8 million head of cattle on feed on feedlots of 1,000 or more head. This is 1 percent below the March 1st number from last year and near the lowest level of cattle on feed since the USDA started keeping track in 1996. There is also the PED virus that at this point has taken and estimated 5-6 million hogs out of the market.
So, lower priced corn, a shift from wheat to corn, higher animal weights and adverse weather conditions have certainly contributed to the increase in corn demand for feed this year but, is it enough to account for a 965 million bushel increase from year to year? The low level of cattle on feed and the PED virus in the hogs could be suggesting that the USDA is vastly overstating feed demand for corn.
However, there has been speculation out there that the USDA is using this high feed number to compensate for some miscalculations of corn stocks in the past. This may or may not be true, but next Monday on the USDA March 31st Quarterly Grain Stocks and Perspective Plantings report we will see where we stand with corn stocks going forward. If the USDA is overestimating feed demand and they are not accounting for previous miscalculations then there could be a possibility that corn stocks come in higher then projections.
Either way this March 31st USDA Stocks and Acreage report is very important and will set the tone in grains for months to come. You can sign up for our morning newsletter if you would like to see Zaner Ag Hedge's report estimates. We are one of the few companies that is polled by the big media outlets, so you will see us there as well.
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May Corn Daily chart:
May Soybeans Daily chart:
May Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or firstname.lastname@example.org
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