CME: Markets React Badly to Recent Report Data
US - The corn balance sheet appears little changed from the previous month and yet markets reacted negatively to a number of key data in both the WASDE report as well as the grain stocks survey and the survey of wheat seedings, write Steve Meyer and Len Steiner.The quarterly grain stocks survey has been producing plenty of
surprises in the last two years and this release threw another
curveball at the market. Ahead of the report analysts were expecting 1 Dec corn and residual stocks to be 9.391 billion bushels while the USDA report pegged overall corn stocks at 9.641
billion bushels.
The higher than expected stocks imply significantly smaller feed use compared to a year ago since ethanol
production was particularly strong during the quarter and offset
any declines in corn exports.
Grain analysts estimate that feed
corn and residual use for the Sep - Nov quarter was down nine per cent
compared to the previous year, a significant number given higher numbers of hogs and cattle on feed.
Chicken numbers are
down and that has clearly had an impact but it seems that other
factors are at play, namely a larger supply of DDGs going into
the domestic supply rather than exports.
The USDA balance
sheet currently shows feed and residual corn use for 2011/12 at
4.6 billion bushels, four per cent below year ago levels. But with higher
ethanol production (hence more DDGs) and burdensome wheat
supplies (more wheat feeding) it remains to be seen if the feed
and residual number will be adjusted lower in the coming
months. Indeed, the wheat planting numbers were one of the
more bearish news in the latest USDA updates.
Pre-report estimates pegged total wheat seedings at 40.933 million acres,
slightly higher than the 2011 seedings of 40.646 million acres.
The 12 January report pegged winter wheat seedings at 41.947
million acres. This represents a 3.2 per cent increase from the previous
year and winter wheat seedings are currently 12.4 per cent higher than
two years ago.
The increase in US domestic wheat seedings
combined with higher wheat supply in other markets is expected
to put further downward pressure on wheat values, with some
expecting soft wheat returning to the long term $5-5.5/bu range.
In that scenario, wheat would continue to provide a strong alternative for inclusion in feeding rations and put downward pressure on corn prices (see our discussion in the (1/6 DLR).
Markets also were gearing up for a modest reduction in
the final yield for the crop year. Instead, USDA slightly increased both the final yield and harvested acres. The net in crease in supply was offset by a 50 million bushel increase in
exports. USDA opted to leave ethanol use unchanged despite
reports of record ethanol production.
It is likely that the surge
in ethanol production was due to the fact that refiners rushed to
maximise use ahead of the expiry of ethanol credits. Should the
current rate of ethanol production be sustained, however, it
could add another +100 million bushels of demand to the balance
sheet.
At this point markets will start to focus on early estimates for the 2012/13 marketing year. USDA will release an
early read in its February outlook meetings. There is broad expectation that corn acres could increase by as much as three million
acres this spring and with reduced feed use, ending stocks for
2012/13 could end up over $1.6 billion bushels, which could pressure corn below the $5 threshold.