A Rising Tide Lifts All Boats
Jan 18, 2013
There was nothing contained in the Jan crop reports that signal the dawn of a new bull market in corn, soybeans, or wheat. However, price action following the numbers presented by the USDA has been more than enough to confirm that the market has fundamentally shifted its price bias posture from negative to a neutral/positive. Now that the reports have established a working benchmark for the trade going forward, the most compelling questions for producers and end-users alike is the magnitude and endurance of the strength seen in values, thus far. It’s important to recognize that it is corn that has firmly established itself the value leader for the next several weeks – it will set the price tone. Soybean price prospects hinge on a finish to SA production, the extent in which the pace of exports can be modestly sustained with the advent of SA soy crop availability, and whether the exceptional US crush pace continues. While wheat has some intrinsic price positive fundamentals in place, its prospects will be in no small measure tethered to that of the row crops.
Given known fundamentals prior to the report’s release - prices were out of line. Leading up to the report’s release March corn had traded down to levels not seen since July 11, 2012, March soybeans were trading where they were at on June 19, 2012, and Chicago March wheat, June 26, 2012. All represent the lowest levels since their respective contract highs were posted amid the Drought of 2012.
Had USDA’s numbers reasonably fallen in line with trade expectations, in other words been deemed "neutral", then the expectation of seeing some kind of price strength, however meager, was well within reason. So, while it can’t be quantified, a modest part of this rally can be attributed to markets simply responding to oversold conditions. The proverbial "dead cat bounce" was in the offing. If futures markets are anticipatory, then this is one in which it already appeared to be leaning just a tad too far ahead of its skis going into the Jan report.
While all the grains were coming out of the gate of the reports in an oversold condition, it is the corn market trumped both soybeans and wheat. And it’s fitting, since it also received the keenest focus by the trade leading up to the report. Neither soybeans nor wheat had the quantity and potentially extreme quality of variables up for grabs in the supply/demand balance sheets.
Corn Fundamentals Now Positively Alter Price Dynamics
Keep in mind that USDA’s Dec 1 stocks numbers of corn, soybeans, and wheat all fell below average trade expectations – by 180 Mil Bu, 14 Mil Bu, and 18 Mb respectively. And it was corn that displayed the widest divergence from expectations versus actual in the most critical metric – percentages. At 8.030 Bil Bu the number dropped out of the low end of the range of trade expectations - off by 2.2% (180 Mil Bu). Despite Final 2012 row crop production numbers exceeding expectations, they are now a moot point in the price discovery process.
The rubber hits the road at the bottom-line of the S&D balance sheet – end stocks. Once again, intolerably tight corn end stocks are now even more so. After incorporating the 300 Mil Bu surge in Feed & Residual generated from the grain stocks report, USDA’s forecasted 2012/2013 corn end-stocks level of 602 MB represents an extreme drop of 6.95% from the Dec report. And results in stocks-to-usage ration dipping to 5.3%. What was an intolerably tight end stocks level, is even more so. Available corn supply is below pipeline levels and demand rationing must occur.
Candidates and Non-Candidates for Rationing Corn Demand
Trade expectations for demand rationing are focused on two line items on the demand side of the ledger - corn grind for ethanol and exports. The issue of exports was addressed in the Jan WASDE with USDA’s aggressive and not unwarranted 200 Mil Bu cut in corn exports from 1.150 Bil Bu to 950 Mil Bu. Do not look for another corn export forecast reduction in the USDA’s Feb WASDE report scheduled for release on Friday, February 8. Been there, done that, and there is every reason to believe that the forecast incorporates both the abysmal export sales pace to date, while allowing for the fact that there remains too much time remaining in the marketing year to further force export sales prospects even lower.
However, what has moved to center stage as the primary vehicle for reducing the pace of corn consumption is corn grind for ethanol. Despite a pronounced reduction in ethanol production, in tandem with profitability, and a ramping up of Brazilian sugar cane based imports – USDA’s forecasted 4.500 Bil Bu corn grind for ethanol has proven resilient to any downward adjustment. The extent that blenders utilize an estimated 1.9 Bil Gals of banked RIN’s in lieu of actual physical ethanol purchases/consumption is yet unknown. And it is of the greatest consequence to the ultimate level of ethanol production. The fact that gasoline consumption is tracking in a pronounced downward trend aggravates ethanol use prospects in 2013. It’s a rather, er shall we dare say, a fluid situation.
The "straw man" – residing on the supply-side of the balance sheets is corn imports. I have run out of fingers and toes to count the number of news items attributing some day-to-day corn price weakness to real or imagined increased corn imports to the US from Brazil. Despite the fact that this is likely the most outsized bogeyman of the US S&D corn dynamics, it may return, with even less credence that it was being presented in the past.
Corn - Near-term Price Prospects
March corn has technically transitioned out of its pre-crop reports oversold condition. Given the fundamental shift of the Jan crop reports, price breaks look to be supported ABOVE the $7 Bu. I wouldn’t look for March corn to print a sub-$7 Bu price near-term. Strong resistance is clustered in the $7.60 Bu-$7.70 Bu area. It’s going to take the introduction of some constructive demand news to get through these areas. Producers need to keep daily track of their local basis levels to optimize cash sales of old crop corn. As always, some reasonable downside price protection on unsold production should be in place. Options, short-term, provide the most attractive approach, in my humble opinion.