FEED Business Worldwide - October / November, 2011
Bad corn growing weather, stormy economic forecasts & USDA accounting magic
by Eric J. BROOKS
After showing phenomenal resistance to bad macroeconomic news, mid September's EU debt drama finally knocked the stuffing out of CBOT corn futures. With central banks struggling to keep liquidity from seizing up, not even a bullish USDA report could stop it corn crashing it some 6% in just days, from nearly US$7.50/bushel to barely US$7.00/bushel.
However, after falling from near US$7.60/bushel in late August, harsh supply side realities established a firm price floor at US$7/bushel, with some buyers rushing in to buy, as they sense a price rebound coming. Such dramatic falls hide the fact that corn supplies are tighter than ever, that USDA is not accounting for the current supply tightness or that a serious crash could floor the market at any time.
In the northern half of America's Great Plains, an early though mild frost caused minimal crop damage. Nevertheless, it implied that the time window for corn to mature and be harvested might be exceptionally narrow this year.
Such weather implications were compounded by the mid September's USDA WASDE report , which reported that American corn yields had fallen to the lower end of analysts' forecasts. Although not at the extreme 140 bushel/acre level of some pessimistic private assessments, the 148.1 bushel/acre yield is the lowest in six years and nearly 10% below peak yields of over 164bushels/acre. In fact, this is the first time since 1973-1974 that corn crop yields have fallen for two consecutive years.
Indeed, the only bearish angle in this entire USDA report was its improved prognosis for wheat supplies, where excellent harvests around the world are expected to more than offset the US's relatively poor crop. The only downside to that assessment is that with corn's having been expensive relative to wheat for over a year, in most places, the amount of extra wheat that can be substituted in feed is probably nearing its maximum proportion.
With yields threatening to go into free fall, the USDA cut its projected end-of-year American corn inventories another 5.9%, from the previous 18.1 million tonnes to 17.1 million tonnes. - Obviously, late June's dream of corn inventories somehow rebounding to some 25 million tonnes is now officially dead. Estimated harvest size was also cut by 3.2%, from 328.0 million tonnes to 317.4 million tonnes.
USDA accounting magic?
Sometimes, it almost seems as if the USDA, like a crafty accountant tries to patch up supply deficits by balancing the books across different department. A simple deconstructive analysis of its figures gives the impression that the USDA did its best to balance American corn harvest losses with overseas supply increases and domestic demand cuts.
In the United States, the USDA cut its domestic corn demand estimate by 7.62 million tonnes, with the feed sector taking the brunt and accounting for 5.1 million tonnes of this reduction. Given how high feed prices are impacting America's poultry and cattle profit margins, that is a realistic assumption. Already, the USDA reported 9% fewer eggs in American broiler chick incubators at this time last year. Such numbers do indeed imply falling feed demand.
Nevertheless, the assumption that the ethanol sector will use one or two million tonnes of corn less might not be realistic. According to a September 14th Reuters report, "for the near term, both domestic and export sales are strong, plus profit margins -- though volatile -- are largely healthy, factors that should feed continued strong demand for corn for ethanol." A year ago, many predicted that US$7/bushel corn would result in lower ethanol production. With profit margins still healthy, unless corn jumps closer to US$8/bushel, there is no reason to believe that US biofuel production will be much affected at this time.
It also reduced its estimated US corn exports by 2.54 million tonnes to a surprisingly low 41.9 million tonnes. Interestingly, the total cuts to estimated US corn demand and exports amounts to a little over 10 million tonnesâ€¦which coincidentally nearly equals the amount by which its corn harvest estimate was cut.
Having kept the US domestic supply/demand balance stable by cutting US corn exports by some 2.5 million tonnes, the USDA then upped its Black Sea (former Soviet Union) corn harvest estimate by 1.5 million tonnes and its expected Argentine corn crop by another 1 million tonnes. By coincidence, this balanced the 2.5 million tonnes of US corn exports which vanished from the world market withâ€¦2.5 million tonnes of Argentine and Black Sea region corn. Is this assessment realistic?
To a certain extent, yes, but on the whole, not really.
Black Sea corn exports are jumping from 5.6 million tonnes in 2009 to 5.7million tonnes in 2010 and a USDA estimated 10 million tonnes this year. That is up from its previously estimated of 8.5 million tonnes but to be fair, the Black Sea region has enjoyed good growing weather this year. With the USDA expecting America to exporting 8.4 million tonnes or 16.7% less corn this year than two years ago, Ukrainian corn cannot be exported fast enough.
La Nina & unrealistic Argentine export hopes
Argentina however, is another story. According to the USDA's own figures, the last two years have seen 2009 Argentine corn exports of 16.5 million tonnes. This was followed by La NiÃ±a's drought-dented 2010 shipments of just 14.5 million tonnes. Dry weather also reduced the 23.3 million tonne 2009 crop to a 2010 harvest of 22.0 million tonnes.
Because more land was sown with corn to take advantage of high prices, the USDA revised its Argentine harvest estimates from 26 million tonnes and 27.5 million tonnes. Argentine corn exports were also penciled upwards from 18 million tonnes to 19.5 million tonnes.
The only problem with these estimates is that Argentina's weather is not co-operating. The USDA should already have been aware that a dry Argentine winter was followed by the appearance of a La NiÃ±a's cold ocean current of South America's west coast. In early September, the US Climate Prediction Centre announced that, "La NiÃ±a conditions have returned and are expected to gradually strengthen and continue into the Northern Hemisphere winter" Goldman Sachs has already weighed in that La NiÃ±a's return, "poses further downside risk to South American production"
Clearly, the USDA, instead of upping Argentina's corn export projection to 19.5 million tonnes, should have cut its previous 18.5 million tonne estimate to a more reasonable 15 .5 million tonne to 16.0 million tonne range. - Such an estimate would take into account both La NiÃ±a's impact on Argentine corn yields and the larger corn planted area.
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