January 16, 2012 | Corn Bears Help Livestock Feeders

For the last five consecutive years, the March corn futures contract traded either limit higher or limit lower immediately following USDA’s release of the January World Agricultural Supply and Demand Estimates (WASDE) and the January Grain Stocks reports.  In keeping with the ‘tradition’, corn futures locked limit lower ($0.40/bu) on Thursday last week following the release of these much-anticipated government reports.  Corn futures extended their losses on Friday by another $0.12/bu, posting a weekly close that was $0.44/bu lower than the previous week.

The initial negative reaction to the corn reports resulted from larger than expected supplies.  In the WASDE report, USDA established its final yield estimate for the 2011 crop more than one bushel per acre higher than the average of analysts’ pre-release estimates (Table 1).  Further, at 147.2 bu/a, that’s an increase of a half bushel per acre from USDA’s December estimate when many had expected the old adage of “a small crop keeps getting smaller” to apply.  When this new yield is coupled with a 100,000 acre increase in harvested acreage to 84.0 million acres, 2011 corn production was pegged at 12.358 billion bushels (Table 1).  While that’s more than 100 million bushels more than the average of the pre-release estimates, it is only 48 million bushels more than the December production estimate. 

On the demand side of the domestic balance sheet, USDA left feed and residual, ethanol, and other industrial corn uses changed from its December report.  However, exports were increased by 50 million bushels to 1.65 billion bushels, reflecting good export shipments and expectations for good future sales.  Thus, ending stocks for the 2011/12 marketing year declined by 2 million bushels to 846 million bushels.  However, that was 94 million bushels more than the average pre-release expectation.

The global supply and demand estimates further strengthened the bearish reaction to the report.  As a result of the increase in U.S. production, USDA increased global corn production by 0.54 mmt since December.  With global use declining by 0.63 mmt since December, world ending stocks increased by 0.95 mmt.  Given the drought in South America, USDA lowered its estimate of Argentine production by 3 mmt.  However, no change in Brazilian production was made.

The Grain Stocks report also garnered an initial negative reaction last week.  USDA reported that on December 1, 2011, there were 9.642 billion bushels in commercial and on-farm storage.  While that was 415 million bushels less than December 1, 2010, it was 251 million bushels more than the average of the pre-release expectations.
So, by all accounts, the domestic and global supply and demand numbers and the grain stocks information was bearish when compared to expectations going into those reports on Thursday.  Certainly, that’s important because market prices trade in response to those expectations and prices incorporate that expected ‘bullish’ information.  When it doesn’t materialize (as it didn’t in last Thursday’s reports), the market corrects for having bid this bullish information into prices by declining.  It is part of the price discovery process in a market that is flooded with supply, demand, and other related information on an ongoing basis.

While the initial reaction to the reports was decidedly bearish, as discussed above, a little broader perspective is in order though.  First, on the domestic supply and demand balance sheet, recall from Table 1 that U.S. ending stocks dropped by 2 million bushels since last month.  That puts this year’s ending stocks at the lowest since the 1995/96 marketing year.  Importantly, it also keeps the stocks-to-use (STU) ratio at 6.7%, which is the second smallest on record.  Further, the global STU ratio is historically very tight at 14.8% (the tightest since 1973/74).  The world supply/demand balance could grow even tighter as the full extent of the South American drought is realized.

The overall analysis of the January reports is bearish in the short run, but seems to confirm the potential of a more bullish future in the corn market.  With 2011/12 ending stocks now at 846 million bushels and a STU ratio of 6.7%, considerable pressure will be put onto the 2012 crop to meet a domestic and global demand base that is steadily growing.  While last week’s reports did not provide any information relative to the 2012/13 corn marketing year (i.e., the corn crop to be planted in 2012), current estimates are calling for planted acreage between 93 and 95 million acres.  That would be an increase of one to three million acres from 2011 and on par with 2007 acreage. 

The interesting questions then to consider are whether or not this acreage will be realized, and what the national yield could be in such a scenario.  Granted, numerous market and weather conditions will ultimately decide this.  However, last week’s reports already provided a glimpse of the struggle that the corn market will have to grow acreage as 2012 winter wheat seedings jumped to 41.947 million acres (up 1.2 million acres from 2011).  Most of the increase is from hard red winter wheat in the southern plains where growers have to maintain wheat acres rather than switch to corn due to the extremely dry conditions there.  However, in most other areas of the corn belt (including eastern South Dakota), most producers will favor corn over soybeans due to higher expected profits on a per acre basis.  Good fall weather last year also aided many of them in applying fertilizer in anticipation of growing corn.  Spring weather will tell, though, whether these additional acres do get planted to corn, or if a wet spring forces growers to plant soybeans later in the spring.

Much is also being made of the idea that the U.S. almost never has more than two consecutive years of below-trend level national corn yields.  Because 2010 and 2011 both saw below-trend yields, this wisdom would say that 2012 corn yields will be at or above trendline forecasts, which would put the corn yield into the 160 bu/a range.  While this is certainly possible, it doesn’t have to happen either.  Further, as more and more acres are planted, more ‘marginal’ acres come into total acreage that typically do not produce above-average yields.

The point to this prognosticating is this:  there remains several production risks out there for the 2012 crop and as these events unfold in the next six months, the corn market will be highly sensitive and react bullishly to threats of lower acres and yields.  At some point, these concerns become the market’s central focus, whether or not they are actually well-founded.  Thus, a rally into spring is quite possible as the corn market makes its final push to ‘buy’ acres.  Weather conditions during planting could further strengthen such a rally.

Livestock producers, having weathered a $0.80/bu corn market rally from mid-December to early January, now have an opportunity to lock in feed needs on the weakness following the January USDA reports.  More than half of this gain was erased last Thursday and Friday.  Cattle feeders and pork producers should consider covering some of their feed needs for at least a month or more on this price break.  Locking in at least a portion of corn needed for the first half of the year would be prudent if it results in a feeding cost of gain that allows a profitable return on the livestock.  So, pencil out breakevens for livestock currently on feed and projections for new placements.  If today’s cash corn price in your market provides a positive return on those animals, take advantage of those price levels – at least on some portion of your production.

Cash corn sellers are going to be resigned to hold off on sales for a while as the market digests these bearish reports.  But, once the market reconsiders the overall tight domestic and world supply/demand balance and 2012 expectations, a better sales level will likely be realized.

The information in this report is believed to be reliable and correct.  However, no guarantee or warranty is provided for its accuracy or completeness.  This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers.  The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information.  There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.