November 14, 2013
Reality bites with a pivotal USDA feed crop report's release
Monetary reflation and months of deflation discounted the bearish sting out of November'sWASDE report, but it still left feed crops with very little in the way of upward potential.
By Eric J. BROOKS
An eFeedLink Exclusive Commentary

Corn: Yields, inventories outflank fewer acres, more exports
The market's first, knee-jerk reaction was to bid up feed crop prices by more than 2.0%, in response to higher than expected exports and abandoned acreage. In particular, the 87.2 million acres of corn harvested was down substantially from the estimates of over 97 million acres being planted six months earlier. That's the price paid by one of the wettest, coolest spring seasons delaying much of the planting.
Exports which totaled just under 18 million tonnes in 2012-13 and where expected to only be 31.1 million tonnes in 2013-15 where adjusted upwards to 35.6 million tonnes. Moreover, with 72% of 2013-14's export volume already contracted in the first three months of this new marketing year, America's corn export estimate may yet be revised upwards.
That puts the US back in first place in world corn exports, after Brazil's 2013-14 million tonne exports overtook it for the first and only time last year. Although a far cry from the 45 to 55 million tonnes that it usually exports, the doubling of corn exports removes a major source of deflationary pressure from the world corn market, particularly with the dollar staying weak and the US Federal reserve extending its US$80billion/month money printing spree.
But there are also deflationary forces at work: With inventories rebounding from the previous year's ultra-low 18.6 million tonnes to 47.11 million, the stocks to use ratio moves out of the 5.5% to 7.5% range it languished in for several growing seasons. Granted, thanks to those abandoned acres, it was not as high as the 51 to 55 million tonnes of closing 2013-14 inventories feared by many analysts. Still, despite this lowball estimate, Goldman, in a report focusing on demand side dynamics such as biofuel output or lower fertilizer costs (which will make yields climb higher) expects corn stocks to jump to over 58 million tonnes in 2014-15.
And at 14.3%, US corn's stocks-to-use ratio is on the low side of its traditional range. But with a near record yield of 160.4 bushels/acre offsetting the fewer acres reaped, the inflationary factors are marginally overwhelmed by the deflationary ones. Especially since analysts were just three months ago thinking that 155bushel/acre range estimated by the USDA was too high, with some penciling in as low as 150bushels/acre.
Hence, after a spirited price jump on the day of the USDA report' release, the fact that inventories are more than doubling seems to have intersected with the reality that world corn exports are rising a sharp 7.5%, from 2013-14's 102.7 million tonnes to 110.4 million tonnes in our current marketing season. Moreover, not only are US exports rebounding but shipments by Ukraine and 12 former Soviet Union states are becoming low priced competition for South American exporters, with Ukraine's 20 million tonne projected exports for 2013-14 rivalling those of Brazil and exceeding Argentina's.
With export supplies and key inventories all risen faster than demand can absorb them, corn prices sagged back to their previous levels within two trading days.
Soy deceptively stronger
The picture was slightly more bullish for soy. Although some of those abandoned corn acres were surely replanted with beans, that was outflanked by an improved oilseed export outlook. 2013-14's 35.9 million tonnes of exports was originally penned to rise a modest 3.6% to 37.2 million tonnes. However, with China's broiler sector having fully recovered from H7N9 bird flu more rapidly than anticipated, this was revised to 39.5 million tonnes, up 10% in one year.
In fact, the USDA expects China, which saw bird flu keep soy imports flat at 59 million tonnes for two growing seasons, will see inbound soy shipments rise a sharp 16.9%, to 69 million tonnes during 2013-14. All this means that instead of rising from their unbelievably low 2013-14 closing level of 3.8 million tonnes, America's soy inventories are now projected to close 2013-14 at a still very low 54.6 million tonnes. This leaves the US soy stocks-to-use ratio at a still very low 5.2%.
In theory, that makes soy more bullish than corn and sure enough, when prices deflated in the days after the WASDE report's release, soy fell by less than corn. But even so, this may represent a misplaced gamble -and in this market, in different ways, soy buyers and corn sellers are both gambling.
Gambling with China, ethanol mandates, Latin weather
On the oilseed side, Richard Feltes at RJ O'Brien noting that even though America usually exports more corn than soy and its corn crop is four times larger, farmers are selling considerably more soy to market than they are corn, noting that, "US soya bean export inspections in 2013-14 [as of mid-November] are 418 million bushels [11.4 million tonnes], versus only 223 million bushels [5.7 million tonnes] for corn."
While this is making American cash crop corn prices outperform futures, it also means that US corn farmers prefer to keep their corn and try to sell it at a better price in the future. Given that next year's EPA ethanol content recommendations are being set after congressional elections were held, that is highly risky, as policymakers no longer have a political incentive to keep ethanol demand (and corn prices) high.
A similar risk is being entertained by those who have kept soy's price from sinking as much as corn. Superficially, China is importing more soy, and that begs the question of 'why are US farmers selling so much of the soy crop early, when China's demand is obviously rising?"

University of Illinois agricultural economist explains that, "Everyone understands what the Chinese are doing. Many of the soybean purchases are like call options for the Chinese in relation to the soybean crop in South America. "If there is a record crop out of South America, many of these sales will be cancelled. Otherwise they will be used."
But the announced China soy export orders, at least over the short term, are sustaining soy at near US$13/bushel and farmers are taking advantage of what are essentially, 'virtual' (in the quantum physics sense of the word) Chinese purchases of US soy get a higher price than they might do so in several months.
At this time of year, the market's direction is set by South American crop growing conditions. The Pacific Ocean off South America is at near-normal temperatures. This implies that barring any chance occurrences of the unexpected, the record soy and corn acreages should yield record feed grain and oil seed crops.
Indeed, we are no longer in the worlds of 2010 to 2012, when bad US and Latin American harvests brought soy inventories down in a drastic way and a once-in-thirty years drought made the America lose the corn export king title. Weather, crop yields and market dynamics are all returning to normal, and deflating the market on the way to doing so.
Hence, rather than hoard corn like America's corn farmers, it may be wiser to sell it forward the way the soy growers did, as crop prices look set to trend down as southern hemisphere harvests approach closer. Fortunately for sellers, the expansive monetary conditions and the discounting of corn prior to the report will keep corn prices mostly flat but with a downward bias, while soy's decline should be constant, but gentle over a few months.
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