Bryan Doherty: Tight inventory confirmed
The USDA report released this past week for grain stocks and supply and demand had a friendly tone, and the market reacted as such. As expected, both corn and bean carryout dropped slightly, and this was enough to keep the long-term uptrend intact. Traders continue to trade the inverse of the directional trend of carryout, which has been down since June 30.
From a perspective of analyzing the report, there are a few key numbers that we think have bearing, and then just as importantly, the reaction. As an example, if the market is anticipating 800 million bushels of carryout and, in fact, the corn figure comes in at 745 million, this figure is less than estimated. The 800 million estimate is below the previous month's 832 million. So, in fact, it's where the actual number comes out relative to the expectations that is significant, not just relative to the previous month. For corn, this was supportive, as the USDA lowered yield and, in turn, reduced carryout. World carryout also narrowed in. The world ending stock figure dropped from 130 million metric tonnes to 127 million metric tonnes.
A figure that many watch is the carryout (stocks) divided by usage, giving you a stocks-to-use figure. For the world figure, this comes in at 15.2%, near three-decade low levels. For U.S. corn, it is at 5.5%, the second lowest number in 30 years.
The bean report was also supportive with ending stocks at 140 million. Most analysts were looking for 150 million. The stocks figure last month was 165 million. Beans responded favorably with a close to limit-up move the day after the report. Follow-through the second day confirmed a bullish tone. Weather issues in South America may be providing support for beans, just as they are for corn.
Regardless of what the report says, the market will react. In this case, the market decided that lower carryout was important, and prices moved higher in reflection of this change. When stepping back and looking at the big picture, the rationale behind higher prices is that, with tight historical inventory, the market may have to ration the supply. Rationing is a accomplished through higher prices. This is likely where the market is currently focusing its attention. With current production uncertainty for southern hemisphere crops and eventually northern hemisphere crops in spring and summer, prices will likely be at a premium until more is known regarding the crops.
So for now, the market trend is up. When prices move higher, this also encourages speculative buying interest. Farmer selling becomes light and speculative selling pressure eases. Yet, at some point, there will be a turning point. When it happens, it could be violent. The reason? As long as prices are moving higher and long position building, few are heading for the exit gate. Once prices turn, there could be mass liquidation and, consequently, heavy selling pressure. This could suggest that the rally in the grain markets, which began last July, could come to an abrupt halt and lose a third or half of their rally in a matter of weeks. As producers, you should be aware that this can happen, despite friendly outlook. Bull markets always look friendly as long as prices are going up.