How the analyst stole Christmas
Remember how the Grinch hated Christmas because, depending on various theories, his shoes were too tight, his heart was two sizes too small, or his head wasn’t screwed on just right? Whatever the reason, the Grinch went on to steal the Whos’ Christmas until, as the story goes, his heart grew and he returned the bounty. A nice story; it’s a seasonal classic, but one not likely to be repeated when it comes to the corn market this holiday season.
Last week, I presented my outlook for 2014 at the annual DTN/The Progressive Farmer Ag Summit in Chicago. A quick sidenote: My thoughts on traveling to Chicago in December that I discussed in the column, “City With the Cold Shoulders,” held true again this year.
Anyway, included in my presentation was a lengthy look at corn’s supply and demand table both “real” (as real as USDA could possibly be) and imagined. The results, as DTN’s Editor Emeritus Urban Lehner reported in his blog entry, “Magic Moments From the Ag Summit,” cast a chill on the proceedings.
The cold, hard fact is that as we look ahead to the balance of the 2013-2014 marketing year, USDA seems to be overestimating corn demand on all fronts. Those familiar with this column will recall that I’ve discussed, in detail, the problems facing three major legs of corn’s demand stool. Starting with exports, through the first 15 weeks of the 2013-2014 marketing year, corn shipments were on pace to hit 1.4 billion bushels (bb), 4 percent below USDA’s December estimate of 1.45 bb, but oddly in line with what had been projected in November.
Next is feed demand. For some inexplicable reason, USDA continues to increase its estimate for corn used as feed, now up to 20 percent more than what was projected for 2012-2013, despite official numbers that cattle on feed are running almost 7 percent below the previous year. As for hogs, the ongoing battle against Porcine Epidemic Diarrhea Virus (PEDV) could slow herd expansion in 2014, limiting feed increases, as well. If cattle and hogs aren’t likely to eat 20 percent more corn, it seems improbable that chicken and turkeys will make up the balance. The bottom line is feed demand could be closer to 4.8 bb rather than the December estimate of 5.2 bb.
Ethanol demand could also come under fire in 2014 if EPA follows through on its idea of revising ethanol volume requirements. As discussed here at DTN, ethanol demand for corn in 2014 could lead to 2013-2014 marketing year usage of 4.73 bb.
The December round of government supply and demand numbers upped ethanol demand to 4.95 bb.
There is also a fourth, lesser leg: industrial demand excluding ethanol but including seed. It is interesting to note that with most of the world projecting a 5 million acre (ma) decrease in domestic plantings (93 percent of 2013’s initial 97.4 ma), USDA has increased other industrial use by almost 4 percent. Let’s assume seed demand is indeed lower than the previous year. A 50 million bushel (mb) decrease in this category’s demand could occur as opposed to the projected 50 mb increase.
Adding all this up—the 50 mb from exports, 400 mb from feed, a possible 220 mb from ethanol, and another possible 100 mb from industrial (and residual) could theoretically increase ending stocks by 800 mb, putting the total at 2.562 bb. If that isn’t bearish enough for you, ending stocks-to-use would be calculated at 20.9 percent. The last time domestic ending stocks were near 20 percent was the 2004-2005 marketing year when the national average cash price was estimated at $2.06. The time before that was in 2000- 2001, when average cash price came in at $1.85.
All that having been said, the question remains. If corn is so bearish, why is basis (the difference between cash and futures prices) holding firm and the carry in futures spreads at neutral to bearish levels at worst? I think there are two possible answers.
First, farmers have been unwilling to sell corn over the first quarter of the 2013- 2014 marketing year. With limited cash supplies available, merchandisers have been forced to push basis against the slow, steady downtrend in the futures market. How might this end? I don’t want to overgeneralize, but those holding cash corn could fall into two camps: one that is looking to sell when the calendar turns to 2014; the other determined to sell when the corn market rallies again. If it is the first, then basis could quickly start to weaken in the New Year. If it is the second, basis and spreads could remain firm, sparking a wave of noncommercial short-covering that will lead to a short-lived rally in the market.
The second possibility, one that may need more space depending on how the situation develops early in 2014, is that the corn doesn’t exist. Maybe the U.S. didn’t produce a near 14 billion bushel crop. As more than one person has pointed out to me, where are the corn piles if supplies are record large?
The analyst, his Grinchy voice a growl, says corn’s future seems bleak. But he’s open to giving his outlook a tweak. Much will depend on how the situation evolves, but for now it is unlikely his bearishness dissolves. — Darin Newsom, DTN