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COMMENTARY & ANALYSIS
 
October 4, 2019
         
Feed crop prices, immature corn, cold weather quickly approach a mid-Autumn cross-roads
 
Will impending USDA yield changes, acreage revisions, and approaching first frosts make for an exceptionally volatile October?
 
By Eric J. Brooks
 
An eFeedLink Hot Topic
 
 
Even though the USDA has thus far frustrated the hopes of market bulls, a rally opportunity is again emerging, most particularly in corn markets. This ironically may come courtesy of… the USDA.
 
Whereas a Bloomberg News survey showed analysts expecting a corn opening inventory estimate of 61.67 million tonnes, the USDA shocked the market by slashing its opening corn inventory estimate from the previous 62.1 million tonnes to 53.70 million tonnes.
 
We will not know whether this radical adjustment is due to opening inventory adjustments, unexpectedly high feed consumption, or a combination of the two. We will only know when the next WASDE report is released in the latter half of next week. Given that both corn and beans saw downward inventory revisions, unexpectedly high feed demand seems the more likely reason.
 
On the basis of the previous WASDE report, this year's harvest is coming in at least 8 million tonnes below domestic demand and exports. That would shift America's closing 2019-20 inventory to approximately 47 million tonnes and the US stocks-to-use ratio to just above 13%. The world (excluding China) corn stocks-to-use ratio would fall to approximately 12%.  While somewhat tight, this is actually a preliminary, somewhat conservative estimate.
 
That's because there's a significant short-term risk of additional supply-side downgrades. Hence the 6.5% jump in corn prices over two days from US$3.71/bushel to US$3.94/bushel. That was their highest level in two months, before deflationary macroeconomic news trimmed a small portion of their recent gains. At the time of publication, in the absence of any news, corn was doing a sideways decline into the US$3.80-90/bushel range.
 
Consequently, the upcoming USDA crop report will prove critical –as the agency traditionally revises crop acreage estimates in October. –And many analysts (including this one) assume the USDA has been overstating corn planted acreage throughout this entire, flood delayed crop growing season.
 
Moreover, numerous ground-level reports continue to contradict near the official USDA corn yield estimate of 168.2bushels/acre. When casual observations of sub-par crop growth by industry observers are combined with the high probability of frost damage, it strongly implies that USDA corn yield estimates will be cut in either this report or the one to come.
 
Moreover, at the start of October, only 11% of America's corn crop was harvested, versus the longterm average of 19%. Entering October, approximately 45% of the corn crop is mature versus a five-year average of 75%. Wet weather is holding back the harvest in some areas, the crop's maturing in other places. Moreover, cold weather and the first Autumn frost is due to strike parts of the Midwest over the next two weeks.
 
 
The news was also mildly bullish for oilseeds, as the USDA reduced its 2018-19 old soy harvest estimate by 3.2 million tonnes. At 120.5 million tonnes, the 2018-19 harvest was no higher than that of the previous year's record production. –It also implies that instead of 17.4 million tonnes, US soybean inventories will close out 2019-20 at slightly above 13 million tonnes; even less if the next report slashes yields and this year's estimated harvest size.
 
It also implies that instead of 99.1 million tonnes, world soybean inventories will fall from 109.2 million to under 96 million tonnes, their lowest level in four years. At 27%, that would make for a far better closing world soybean stocks-to-use ratio than the 30%+ that seemed to be in the cards just a few months ago.
 
All this coincided with early October news that China purchased 1.81 million tonnes of the 2.332 million tonnes of US beans exported in the preceding week, with the Netherlands and Indonesia accounting for most of the rest. China is expected to possibly procure up to another 200,000 tonnes before mid-October's trade negotiations. 
 
While that was enough to lift beans from its near US$8.85/bushel trading range to slightly over US$9.00/bushel, the real focus at this time is on America's still immature and more-at-risk corn harvest.
 
Weather needs to be watched closely over the next two weeks, as does the next USDA report. –Any news that slashes the US crop by enough to pull the world (excluding) China closing corn stocks-to-use ratio below 12% will be strongly bullish.
 
At the same time, we should be aware that the next USDA report may or may not incorporate the corn yield and harvest impact of Autumn frosts that may occur in the week between the time of this article's publication and the next WASDE report.
 
In that way, the mid-October period following the next USDA report is a time when upward price volatility may occur –but due to factors not entirely reflected within its statistics. At this time, the weather inducing volatility, yield and harvest prospects are probably changing faster than the next report's statisticians can capture it.
 


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