Quarter Stocks Preview: Corn Question
(DTN) Maybe, just maybe, we are about to put the 2009-2010 corn crop to rest with the release of the Quarterly Stocks report on Thursday, Sept. 30. Again, I did say maybe, as there is also a possibility this report could open a Pandora's Box of new questions.
As has been the case for quite some time now, though, discussion of U.S. ag markets must begin with corn. The June 30 Quarterly Stocks report showed 4.31 billion bushels of corn on hand, the fourth-largest third-quarter stocks number on record, trailing the 1982-83 marketing year, and 2005-06 and 2004-05. More importantly, the stocks number implied unusually strong third-quarter demand of 22.9 percent of estimated total supplies of 14.791 billion bushels.* (*Total supplies have continued to change in monthly supply and demand reports.)
Using the wide array of numbers available to project what might be seen in the September Quarterly Stocks report (as of Sept. 1) gives us a variety of possible outcomes. First, if USDA's September estimate of 1.386 bb is realized, it would imply much larger-than-average fourth-quarter demand of 21.1 percent, leaving ending stocks at only 9.4 percent of estimated total supplies.
Next, if average quarterly demand of 17.8 percent (demand as a percent of total supplies) is seen, then the quarterly stocks number for corn could come in at approximately 1.677 bb, well above USDA's September ending stocks estimate (see above), implying near-average quarterly demand of 11.3 percent of total supplies. If realized, this could be viewed as quite bearish for the corn market as it could increase implied ending stocks-to-use to 12.5 percent from the 10.3 percent projected on Sept. 10.
Lastly, the quarterly stocks number could reflect the average percent of ending stocks to total supplies of 11.9 percent. If so, the amount on hand as of Sept. 1 could come in at 1.76 bb, putting implied ending stocks-to-use at 13.1 percent, Again, if this situation is realized, it could be interpreted as extremely bearish for the corn market, meaning the recent rally would have contracts overvalued.
Those are some of the possibilities, but what is the market's opinion? Recently, the carry in the December-to-March spread has stabilized between 12 1/2 cents and 13 1/4 cents. This range could be viewed as neutral to bearish, not surprising with early harvest getting under way. However, the deferred spreads of March-to-May and May-to-July saw a sharp weakening of carry from early June through early September, indicating a far more bullish long-term commercial outlook.
The corn spread situation in whole would seem to suggest the Sept. 1 quarterly stocks number should come in close to what USDA projected on Sept. 10, again implying much larger-than-average fourth-quarter demand (or, some would argue, the fact that the bushels never existed due to test weight issues) and smaller-than-average percent of stocks on hand to total supplies.
However, since early September, those same deferred futures spreads have seen their carry start to slowly strengthen once again. What does this mean? One possibility is that the most bullish scenario, at least in regard to 2009-2010 ending stocks/2010-2011 beginning stocks, was factored into the recent rally that saw the December contract test $5.25. If so, then a quarterly stocks number in line with the September USDA ending stocks number of 1.386 might actually be viewed as bearish.
One last consideration is the possibility that the rally started to shut down demand. The December corn contract rallied $1.00 between the close of June 29 ($3.44) and the high through Aug. 31 ($4.45 1/4), then rallied almost 85 cents from the Aug. 31 close ($4.39 1/4) through the Sept. 20 high ($5.23 3/4). Most likely, the initial two-month rally did little to slow demand, meaning stocks as of Sept. 1 could indeed come in as low as projected. However, the next quarterly stocks report as of Dec. 1 (released mid-January 2011) could show the three-week rally in early September reached high enough to start to slow demand. This again would be indicated by the continued strength of the carry in the December-to-March futures spread.
The bottom line for the corn market heading into next week is this: Long term, the market remains bullish, despite the possibility that a bullish fourth-quarter number has already been traded and a likely more-bearish first-quarter stocks situation could be implied in the Sept. 30 report. Therefore, if the market does come under pressure for a few days, possibly up to a couple of weeks, any sell-off should be met with renewed buying enthusiasm as the market looks ahead to a more bullish second half of the 2010-2011 marketing year.
Darin Newsom can be reached at darin.newsom@telventdtn.com
http://www.dtnprogressivefarmer.com/
As has been the case for quite some time now, though, discussion of U.S. ag markets must begin with corn. The June 30 Quarterly Stocks report showed 4.31 billion bushels of corn on hand, the fourth-largest third-quarter stocks number on record, trailing the 1982-83 marketing year, and 2005-06 and 2004-05. More importantly, the stocks number implied unusually strong third-quarter demand of 22.9 percent of estimated total supplies of 14.791 billion bushels.* (*Total supplies have continued to change in monthly supply and demand reports.)
Using the wide array of numbers available to project what might be seen in the September Quarterly Stocks report (as of Sept. 1) gives us a variety of possible outcomes. First, if USDA's September estimate of 1.386 bb is realized, it would imply much larger-than-average fourth-quarter demand of 21.1 percent, leaving ending stocks at only 9.4 percent of estimated total supplies.
Next, if average quarterly demand of 17.8 percent (demand as a percent of total supplies) is seen, then the quarterly stocks number for corn could come in at approximately 1.677 bb, well above USDA's September ending stocks estimate (see above), implying near-average quarterly demand of 11.3 percent of total supplies. If realized, this could be viewed as quite bearish for the corn market as it could increase implied ending stocks-to-use to 12.5 percent from the 10.3 percent projected on Sept. 10.
Lastly, the quarterly stocks number could reflect the average percent of ending stocks to total supplies of 11.9 percent. If so, the amount on hand as of Sept. 1 could come in at 1.76 bb, putting implied ending stocks-to-use at 13.1 percent, Again, if this situation is realized, it could be interpreted as extremely bearish for the corn market, meaning the recent rally would have contracts overvalued.
Those are some of the possibilities, but what is the market's opinion? Recently, the carry in the December-to-March spread has stabilized between 12 1/2 cents and 13 1/4 cents. This range could be viewed as neutral to bearish, not surprising with early harvest getting under way. However, the deferred spreads of March-to-May and May-to-July saw a sharp weakening of carry from early June through early September, indicating a far more bullish long-term commercial outlook.
The corn spread situation in whole would seem to suggest the Sept. 1 quarterly stocks number should come in close to what USDA projected on Sept. 10, again implying much larger-than-average fourth-quarter demand (or, some would argue, the fact that the bushels never existed due to test weight issues) and smaller-than-average percent of stocks on hand to total supplies.
However, since early September, those same deferred futures spreads have seen their carry start to slowly strengthen once again. What does this mean? One possibility is that the most bullish scenario, at least in regard to 2009-2010 ending stocks/2010-2011 beginning stocks, was factored into the recent rally that saw the December contract test $5.25. If so, then a quarterly stocks number in line with the September USDA ending stocks number of 1.386 might actually be viewed as bearish.
One last consideration is the possibility that the rally started to shut down demand. The December corn contract rallied $1.00 between the close of June 29 ($3.44) and the high through Aug. 31 ($4.45 1/4), then rallied almost 85 cents from the Aug. 31 close ($4.39 1/4) through the Sept. 20 high ($5.23 3/4). Most likely, the initial two-month rally did little to slow demand, meaning stocks as of Sept. 1 could indeed come in as low as projected. However, the next quarterly stocks report as of Dec. 1 (released mid-January 2011) could show the three-week rally in early September reached high enough to start to slow demand. This again would be indicated by the continued strength of the carry in the December-to-March futures spread.
The bottom line for the corn market heading into next week is this: Long term, the market remains bullish, despite the possibility that a bullish fourth-quarter number has already been traded and a likely more-bearish first-quarter stocks situation could be implied in the Sept. 30 report. Therefore, if the market does come under pressure for a few days, possibly up to a couple of weeks, any sell-off should be met with renewed buying enthusiasm as the market looks ahead to a more bullish second half of the 2010-2011 marketing year.
Darin Newsom can be reached at darin.newsom@telventdtn.com
http://www.dtnprogressivefarmer.com/
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