The U.S. Department of Agriculture last week issued its report on annual U.S. crop production, resulting in a bearish outlook for corn, a bullish soybean market ahead.

Old crop corn ending stocks were increased to 851 million bushels, while the new 2012 national average corn yield estimate was set at 166 bushels per acre. Total U.S. corn production landed at 14.79 billion bushels, and the carry-out projection for new crop corn is at 1.88 billion bushels.

Ending stocks for old crop soybeans came in at a decreased 210 million bushels, and on the new crop side, the 2012 national soybean yields is estimated at 44 bushels per acre, while increased exports are slated to bring ending stocks down for next year to145 million bushels, a mere 4.4 percent.

Darin Newsom, senior analyst for DTN, said on May 10, said of the USDA’s corn numbers, “The numbers don’t add up.

“If we look at the market signals going into this report versus what the USDA has released this morning, there is little resemblance in the outlook between the two, so it will be very interesting.”

He said the predicted bearish corn market was a result of an increase in old crop ending stocks, with decreased feed demand at the heart of it; plus higher-than-expected new crop ending stocks, with the new crop anticipated at being the largest producers have seen, and an increase in world ending stocks.

“If you offered me odds on this happening, even the high pre-recorded estimates were not showing the possibility of increased old crop ending stocks,” Newsom said. “You can go back to USDA’s own quarterly stocks numbers and it shows there was very little chance at all of stocks remaining where they were, that they were going to have to decrease with even average demand over the second half of the marketing year.

“So the fact that we saw an increase in old crop domestic and world corn ending stocks leaves you scratching your head.”

Newsom said the decrease in old crop soybean stocks was as curious as the old crop corn situation, adding that there has been good demand for soybeans, but not extraordinary demand. He said many of the daily sales are through 2012-2013, and that exports have been average at best.

Corn supply, demand

Newsom said the old crop corn situation is where most of the interest lies, with feed demand dropping by 50 million bushels. Along with that, ethanol production has decreased since 2010, and now is predicted to remain unchanged at 5 million bushels for the 2012-2013 marketing year.

“This is a warning sign to me,” Newsom said, “because there is a real risk that we’re starting to develop a trend that (demand) may be topping out.”

The market that has been in place since 2005 may be showing this, and that the 2010-2011 report of 5.1 million bushels, for now, seems to be the peak in ethanol demand for corn.

The report showed a 50-million-bushel decrease in feed demand for 2011-2012, while exports were left unchanged, and total use also dropped by 50 million bushels.

Total supplies were left unchanged at 13.5 million bushels. It all combined to bring the carry-out number to 851 million bushels, compared to the April figure of 801 million bushels. Ending stocks use bounced up to 6.7 percent from the previous 6.3 percent.

“By itself it’s not a cumbersome number,” Newsom said, “but where there was talk in the industry that we could see corn ending stocks down around 640 to 650 million bushels, this is going to be viewed as a bearish development. This is where it’s going to get interesting.”

In the new crop corn, production estimates come in just short of 14.8 billion bushels. Ethanol demand is unchanged at 5 billion bushels, and the ending stocks-to-use figure lands at 13.7 percent for 2012-2013, up from the 6.7 percent figure for 2011-2012.

Soybean supply, demand

Ending stocks decreased by 40 million bushels according to the USDA’s May 10 report. Figures showed an increase in soybean demand, with supplies left unchanged and reflecting a strong export demand.

“Export demand was strong, but only strong enough to just meet this 1.2 million bushel figure,” Newsom said. “We were slightly behind pace to meet the 1.29 million bushel (projection), so to put another 25 million bushels on there, we’re going to have to see a pretty good pace increase for shipments,” Newsom said. “We need to keep an eye on those to see if the pace begins to increase, if demand for U.S. soybeans gets as strong as what the USDA is looking for right now.”

Sorting it out

Newsom said the old crop corn outlook is seeing an inverted market, with July corn at higher prices than September, indicating a bullish supply and demand situation. He said it has grown increasingly bullish over the last 30 days.

“So the fact that we now have a less bullish supply and demand situation which flies in the face of the quarterly stocks numbers and what the market seems to be telling us in its own action by what traders themselves are doing, seems very curious to me. It just doesn’t seem to fit.”

He said new crop corn is looking to be neutral to bearish based on the 2013 carryout showing up on the report.

Newsom said the corn basis report shows an inverted forward curve, with prices now at 10 cents over the July futures contract, which is much higher, considering that prices at this point are usually 10 to 12 cents under the July futures contract.

Newsom said the corn basis is 20 to 25 cents stronger than normal, but USDA numbers indicate corn stocks have grown by 50 million bushels, that the corn situation is not as tight as previous USDA reports have stated. The markets themselves have been saying that the situation has been tightening, he added.

The soybean outlook summary shows that crush demand is up by 15 million bushels; export demand is up 25 million bushels for a total of 40 million bushels despite the pace that has been running behind, and ending stocks to use decreased to 6.8 percent.

“If we look at the July, August and September contracts, we do see that same inverted forward curve. It would seem to suggest that we have seen a tightening of old crop ending stocks. Maybe that 210 million bushels of ending stocks for 2011-2012 could be realistic, it just seemed surprising, seeing the bulk of the increase in demand coming from export shipments,” Newsom said.

He said another surprise was the November-through-next-September’s future spreads for new crop bushels.

“Coming in at 145 million bushels for new crop ending stocks seems to be a bit more severe than what the market is telling us right now,” he said. “(There) could be so much focus has been on the old crop for both corn and soybeans, that new crop has kind of fallen by the wayside. But if we are down to 145 million bushels, look for the forward to curve to get a bit more severe.”

As far as the old crop soybean basis, he said the market is flattening out, finding a comfort zone between the high and the average of the last five years, resulting in no extraordinary basis or demand for merchandisers right now. He said it would suggest merchandisers have been able to obtain soybean supplies to meet demand, and that demand hasn’t picked up so much that they’re having to push the cash market.

“To drop 40 million bushels doesn’t seem to agree with what we’re seeing in the market place at this time,” he said. ” right now it doesn’t seem to be as concerned as USDA would lead us to believe.”

An increase in the new crop soybean demand from 3.076 million bushels to 3.285 mb is due in large part to having a 10 mb increase in crush demand, and a 190 million bushel increase in exports, Newsom said. The projected export number of 1.5 million bushels is huge, he said, adding that the tight South American crop is a large contributing factor.

Also, he said China will continue trying to build up enough ownership heading into what could a much tighter global supply and demand situation.

The new crop soybean ending stocks of 145 mb is one of the tightest on record. Newsom said that leaves little margin for error when it comes to new crop soybeans.

“This number could be the most bullish number we see all year because we are expected to see increased double crop acres;” Newsom said, “and particularly with the speed of maturity of the winter wheat crop, it’s going to be coming off faster” leading to expanded double crop acres.

“If so, this production number could climb, and that could add slightly to our ending stocks number. But for now, this could be the lowest ending stocks to use number that we see over the rest of the marketing year.”

Contact Karen Schwaller at kschwaller@evertek.net.