Amid our bullish Q4 forecasts, September's steep market plunges tested the nerves of many traders and analysts. But we maintained that despite the price declines, the supply situation had deteriorated, ground level shortages were apparent, and the evidence for a significant demand drop was insufficient. Once a rapid harvest's supply flush dissipated, we stated that underlying shortages would become apparent. Early October's USDA corn report confirmed our prognosis slightly ahead of schedule.

 

The USDA reported that corn inventories had fallen far more steeply than anticipated, 12.1% year-on-year to 25.1 million tonnes. This was a whopping 11.3% or 3.2 million tonnes less than analysts had forecast in Bloomberg's late September poll. Broker RJ O'Brien noted that this inventory decline was the biggest shortfall from market expectations on record for a September USDA report.

 

What is even more interesting is where the inventory decline occurred: Farm inventories stayed high but those of grain elevators and other intermediaries fell sharply. Essentially, that was the American farmer shouting, 'We know you are desperate for corn you are and you will not screw us out of a nice, high price!'

 

With the inventory shrinkage completely overwhelming the impact of last week's drop off in exports, corn jumped like a rabbit, rising by 5.6% or US$0.40/bushel, to US$7.56 in one day.

 

With feed wheat supplies rapidly dwindling amid a slew of poor harvests worldwide, it tool, was pulled up by corn. The International Grain Council (IGC) cut its closing world inventory estimated to 175 million tonnes, down by nearly a quarter from its inventory peak of less than two years ago. All this leaves feed grain inventories at their lowest level since 2007-08. However, with no 2008 style financial collapse to pull demand back in sync with supply, Q4 started with a bang, demonstrating precisely the type of feed grain price inflation we expect over the next three months.

 

Granted, October's first trading session does not make for a quarterly performance. The USDA will probably overestimate supplies, as it habitually has done so for over five years. Like the last few rallies, this  one will have serious retreats and hiccups. Nonetheless, ground level scarcity arising from a crop 100 million tonnes below expectations had to materialize once enough of the harvest was in –and that is starting to happen.