Supply and demand numbers from USDA’s September 10 estimates show corn leaning towards the bull with soybeans favoring the bear. However, analysts say major volatility is still in the mix.
The latest USDA report says there is record corn production of 3.2 billion bushels and another record for soybeans at 3.48 billion bushels. Ending stocks for 2010/2011, said USDA, would see 1.116 billion bushels of corn (compared to the earlier estimate of 1.100 billion bushels) and 350 million bushels of soybean (compared to the earlier estimate of 285 million bushels).
“As expected, the report showed a reduction in corn yields,” said Brian Basting of Advanced Trading during a press briefing sponsored by the Chicago Mercantile Exchange shortly after the report was released. “I would think the corn market will now be intently focused on the final yield numbers. I think we’ll see a rapid harvest pace, weather permitting, for the next 30 days. The crop is very mature and I think the market, by the October 8 report, will have a really good handle on what the final number is.
“I think with a fair amount of the market, bullishness is built in with the rally going into the report with the reduction in yield. Now, we’ll wait to see if the actual yields reach the numbers highlighted.”
The corn numbers are “particularly friendly with a stocks-to-usage level already the tightest since 1994/1995 crop year,” said Terry Roggensack of The Hightower Report. “The report opens up plenty of opportunity to see that tighten further. Will we end up with a yield as high as they talk about once the (drought) and heat issues impact the (grain) filling process late in the year?”
For corn, said Basting, the question now becomes: do we see any further increase in corn exports from the 2.1 billion bushel level? The report “also reduced feeding by 100 million. I want to underscore that because the feed component is still the largest use of corn. So, there’s a lot of volatility yet for corn.”
Both analysts expressed a bit of a surprise on the USDA’s upside estimate in soybean yields.
“A 350 million bushel carryout is still plenty,” said Basting. “I think now the market will wait to see the harvest results for soybeans and turn attention to South America.”
One key point on beans: the import estimate for China in 2010/2011 was raised another three million tons to 55 million tons. “That’s over two billion bushels of beans, a tremendous amount forecast to be imported by China.”
The Chinese demand appears to have “saved” the soybean numbers from being “quite negative,” said Roggensack. “Fifty-five million tons in imports is a tremendous revision higher – we were at 49.5 million tons last year. We were at 41 million tons imported by China just two years ago.”
Even with the big increase in demand from China, “world ending stocks for soybeans are still pegged at a record high level,” continued Roggensack. “But the USDA is assuming that Argentina and Brazil will produce 8.5 million tons less soybeans in the coming year. We’ve already seen reports out of Brazil (indicating) their planted acreage will go up.”
Roggensack doesn’t expect Argentina’s soybean acreage to go down. “So, the USDA is counting on a pretty big revision down in yields in the coming year for Brazil and Argentina. While (those nations) have some (drought) issues, you’re still counting on lower yields even though the crop isn’t even planted yet.”
With the USDA report,the wheat market received confirmation “that, despite the fact of losses overseas, world stocks actually increased by three million tons,” said Basting. “United States ending stocks are still over 900 million bushels. We’re not running out of wheat, at the moment. The market will now closely follow what the crop size is in Western Australia and Argentina. But I think the wheat market isn’t nearly as tight as it was three years ago.”
Roggensack agreed that “we don’t have a wheat supply issue in the world or United States. The revision higher in world ending stocks was certainly a surprise considering what’s happened in the Black Sea region.”
Demand and ethanol
So what happens if the USDA’s demand assumptions are off the mark?
“There’s a tendency to look at these numbers and say that demand is a given,” said Basting. “As we move forward, one of the sectors we must monitor closely is the feed sector. The profitability is coming back slowly for some of these sectors – and I underscore slowly.”
There isn’t a push right now towards expansion, noted Basting. “There’s a push towards stabilization in some of the sectors. The hog and poultry sectors are examples. But those sectors would be vulnerable from a demand and usage standpoint if the market was to continue to rally. Looking ahead, that would be the first sector I’d look at as the most elastic or responsive to changes in price.
What might be the impact of the EPA’s impending decision on E-12/E-15 blends?
“That’s a tricky question,” said Roggensack. “When you throw in politics it makes things pretty difficult. But we’re in a world where what comes out of Washington, D.C., is more uncertain than normal.”
Roggensack wouldn’t be surprised to see EPA allow the ethanol mix “to shoot up to 15 percent. In return, they might drop the subsidy for ethanol producers. That could cause a much more volatile swing in the production of ethanol.
“Iowa State University studies show if you drop the subsidy it might cause an initial negative reaction. But in the long-term it wouldn’t have a whole lot of impact on ethanol consumption over the next couple of years.”