June 22, 2012
Feed wheat and DDGS supplies grow tight as USDA corn harvest predictions wither in the summer heat
We expected corn to become scarcer but did not anticipate DDGS and feed wheat would too.
An eFeedLink Exclusive Commentary
by Eric J. BROOKS
In eFeedLink's April 11 corn market report, we threw scorching criticisms at the USDA's record corn harvest prediction. In particular, we declared the assumptions behind the USDA's optimistic corn harvest projection and inventory rebound, "the most discountable - and utterly incredulous - of market influencing variables."
Nature upsets USDA weather optimism, inventories in doubt
We were particularly damning of the USDA assumption that, "end-of-season corn inventories would avoid falling to lower levels by the likelihood of an earlier corn harvest this year," calling it, "just-in-time inventory management courtesy of the weather gods." Ten weeks have passed and the weather gods have given the USDA a most unkind reply.
June has seen large portions of the US Midwest scorch under temperatures exceeding 38Â°C (100Â°F). Some analysts predicted that after midyear, new crop corn futures could sink to near US$4/bushel. But after weeks of arid weather, mid June showers in Wisconsin, Illinois, Iowa brought a scant 0.5cm of rainfall to these corn growing states.
In late June, the USDA reported "abnormally dry or drought" conditions in 60% of the Midwest, 73% of the High Plains and 74% of southern growing regions. According to Steiner Consulting, "drought conditions of varying degrees still exist from Kansas and Nebraska in the west to Indiana in the east." Because this arid weather is occurring during corn's critical flowering and pollination period, it could significantly reduce corn's growth below official crop yield projections.
In contrast to the USDA's perfect weather based projection of 166bushels/acre, many analysts now expect corn yields in the 155bushels/acre to 158bushels/acre range. That would cut America's expected harvest size to 350 to 355 million tonnes - still a record harvest but more than 20 million tonnes below expectations.
This would leave America's 2012/13 ending corn inventories in the 25 million to 27 million tonne range. It is far below the 47 million tonne ending inventory the USDA projected, and not much of an improvement over 2011/12's razor thin 21.6 million tonne ending inventory. Such a dramatic turnabout in supply numbers can rock markets - and they did.
CBOT corn underwent a near-vertical jump of 6.6%, before settling 6% higher, going from US$5.58/bushel to near US$5.91/bushel at the time of publication. Mind you, with the December contract at US$5.06/bushel, there remains hope that the weather will right itself - but at the very least, this dry spell has raised market anxiety over old crop supplies.
Jon Michalscheck, senior analyst at Benson Quinn Commodities summed up the situation, stating that, "The global end user [importer] doesn't appear ready to rush in and cover additional old crop and or large tonnage of new crop yet," - but he added that, "A few more weeks of hot and dry weather in the heartland of the Corn Belt could possibly change their attitude."
Scarcer corn feed substitutes
There is also growing concern that the dry weather would also damage the wheat harvest. Concerns about the US wheat harvest was been accompanied by equally disappointing news about the state of wheat crops in Australia, Russia, Europe and China. With estimates for China's crop cut by 5 million tonnes, Russia by about 3.5 million and Australia and Europe by 2 million tonnes, this represents a significant tightening of feed wheat availability. It especially makes for less feed wheat availability both in China itself and in its main supplier of wheat imports, Australia.
But feed wheat is not the only corn feed substitute starting to undergo a supply squeeze. With ethanol production near its legally mandated limit and American driving miles staying flat, US ethanol production has been falling but inventories keep rising. In the first five months of this year, ethanol plants only made a net profit in March.
This has led to a rash of ethanol plant closings. Linn Group analyst Jerrod Kitt estimated that as of mid June, 3% of US ethanol distilling capacity has already closed down, with another 3% of capacity expected to close by late July.
While in theory freeing up extra corn for feed, these ethanol plant closings come at an inopportune time, as it reduces supplies of lower cost DDGS: According to Allendale analyst Paul Georgy, falling ethanol output is, "causing cattle feeders to find corn to replace DDGS."
It also means that less US DDGS will be available for export -just as China closed its trade dumping investigation and signaled its readiness to import higher volumes of DDGS. Beijing had hoped to use DDGS to keep a few million tonnes of corn imports at bay. Now, with less feed wheat and DDGS on the world market, East Asian countries may be forced to import additional corn in place of scarcer feed wheat and DDGS supplies
Consequently, even as several dozen tonnes of corn are lost to dry weather, importers may need to buy extra corn to make up for the loss of feed wheat and DDGS supplies. With higher demand weighing against a smaller than expected supply increase, that bumper US crop may yet fail to tame corn prices.
All rights reserved. No part of the report may be reproduced without permission from eFeedLink.