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DAVID KRUSE

By Staff | Apr 20, 2012

USDA surprised the trade by leaving its U.S. corn carryover estimate unchanged at 801 million bushel in the latest Supply/Demand update.

The average trade estimate was 717 million. They reduced world corn ending stocks to 122.7 million metric tons. Conab boosted the Brazilian corn crop to 65.14 mmts.

USDA estimated 62 mmts. Conab is right. If U.S. farmers plant 95 million acres we should end the period of tight corn stocks at harvest.

The USDA reduced U.S. ending soybean stocks to 250 million bushels, slightly above the 246 million average trade estimates. It reduced world soybean stocks from 57.3 mmts to 55.52 mmts.

Some expected USDA to cut soybean stocks to 54.5 mmts so the dog almost caught the car. The USDA Brazilian attache had put the Brazilian soybean crop at 66 mmts and the home office accepted that.

With wheat selling below the price of corn and plenty of it, wheat will replace corn in feed bunks. USDA left corn demand unchanged, however arguments could be made for higher ethanol consumption and larger exports.

Some attribute the larger than expected U.S. carryover to the early harvest that is anticipated. While the carryover was some 80 million bushels larger than expected, the early harvest could make 200 million bushels available. It is a valid addition to old crop stocks. End-users report tight farmer holding. That won’t break down until they see the new crop coming on well.

What is to stop that? As a general statement, the corn market should transition from the remarkable period of tight stocks just experienced to adequate supply at harvest. There will be a price adjustment down as a result. End-users will do everything they can to delay purchases until new crop.

Old crop corn prices have traded a sideways range while new crop has broken down. December corn came back after the bearish planting intentions report to test broken support as resistance. Unwinding of bull spreads in corn will give new crop some support, but is also considered to be topping action. A 20-week cycle low is due in mid-May.

The difference between corn and soybean markets is that the U.S. soybean harvest will not relieve the tight stocks situation as can be the case with corn. It will take a bumper 2013 South American soybean crop to do that.

The U.S. is not short of soybeans. The 2010 carryover was 151 million bushels, 215 million last year and the USDA estimates 250 million this year.

Based on growing U.S. soybean carryovers, why are soybean prices higher? The bullish outlook is all predicated on world supply/demand and tightening world stocks.

World ending stocks were 69 mmts in 2010, 57 mmts last year and 55.5 mmts this year in the latest USDA estimate. It’s the falling world stocks that have taken the soybean market higher.

With USDA downward revisions given, it has caught up with private forecasts to make the tight world soybean stocks official. Reports of disappointing yields from the harvest in South America may result in additional incremental world stocks tightening.

The next thing we have to do is produce an adequate soybean crop. USDA said we will produce just 20 million more bushels than we will use here this year, but a couple million more acres would provide more cushion. The bidding for more soybean acres is about done as the planters roll. They usually don’t leave the incentive out there after the auction is essentially over.

The end to tight soybean stocks is going to come about this time next year when the Brazilian crop passes into export channels. South America will likely set a soybean acreage record next year and – with no La Nina to ding it – should set a production record. That is the most likely solution to tight world soybean stocks.

China can work around the supply tightness by front loading U.S. exports ahead of the South American crop and by using reserves. High prices will also cause some demand destruction.

The soybean market by evidence of the record funds long position has much of the bullish outlook accounted for. Lower closes on bullish news is bearish topping action.

The trade expected the USDA to do what it did in the supply/demand report, offering no surprises. Extrapolating the expected trends further, tight corn stocks should ease becoming adequately supplied by harvest this fall with potential to become burdensome the following year.

The La Nina has made everyone think that 160 bushels peracre is a good corn yield when our trend-line potential, given good weather, is 15 to 25 bpa above that.

We have had two years when the harvest price was above the spring insurance guarantee and there should not be a third year, making the 568 insurance base price a one for corn this fall. That base price guarantee will defend corn acreage.

Our strategy was to take revenue crop insurance and forward sell the corn crop creating an LDP-like market opportunity. Every cent December corn falls in price then gets added to 568. We have had two years of La Nina drought-reduced soybean production in South America. Three is extremely unlikely.

Here too, the soybean yield potential, given good weather, is being underestimated. While the soybean market fundamentals appear strong, they are also well known. We have rolled up our put/call option spread to 1360/1500 strike prices. We should get the highest average price we have ever banked for soybeans at harvest.

We have started 2013 hedge sales as when the bull dies it will not revive immediately for the next crop season.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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