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Buyers find U.S. corn a bargain

12/27/2013 @ 4:22pm

This week’s export sales report was delayed a day and came in huge this morning for corn. Trade had expected sales of 550K to 750K, and instead sales of 1988K were seen! That is more than double the high-end estimate that analysts had for this report.

But there are two likely reasons why corn did not rally on this news today. First, it is important to remember that these were sales made from last week when corn was down, threatening contract lows and slowly moved higher.
 
Once again, this report shows that buyers are fully willing to buy bargain price levels but have not shown signs that this buying stays aggressive once corn bounces. A second likely reason why there were not more buyers was simply that we are still seeing holiday volume where very few traders participated today. 

Total March corn volume came in at 44,649 today where even during the holidays we expect to see 50,000 to 60,000. This low-volume day could mean that a small bounce can still be found once more traders come back to the market, but the first factor will still limit gains for now. 

This morning’s ethanol report was about steady with last week seeing 926,000 barrels a day, which is still a solid demand number. Demand has not been a problem for this market lately, and it continues to remain strong. While this could mean that USDA will have to raise demand on the January report once again, it is still tough to expect a rally. 

If five-plus weeks of strong demand news have not caused a rally yet, then why should next week? For that reason the longer term sideways pattern is still expected. Short-term, the recent corn trading range has shrunk even more with the recent high being 436 to 426. Next week could see a pickup in volume and size of the trading range, but it is more likely we will have to wait until next year before seeing a sudden increase in activity…Ryan Ettner
Trade Recommendations:
  • Sell March at 445, risk to 455, objective 422
  • Sold March at 435, risk to 455, objective 422
 
 
Lean Hog Commentary
This afternoon’s Hogs and Pigs report gave us a lot to talk about. USDA went back and made significant revisions to its numbers from the past two years. Their previous 2013 estimates were sharply reduced for the June survey (-1.6 million head) and September (-1.2 million). For this month’s survey they found 65.940 million head of hogs on farms in the U.S. as of December 1. This was 0.7% lower than last year (average guess was -0.1%). Of that herd, the number of hogs that will be slaughtered over the next six months, Kept for Marketings, was found to be 0.6% smaller than last year. The trade was only looking for a 0.2% decline. The flow of hogs that will be slaughtered from December through April was about the same (-0.1% to -0.5%). The weight grouping which will hit in late April and May showed a 1.3% decline. If you had to look for PED-based problems, this is the only area that would show something. It matches up with the recent weeks of heavy PED findings, which would hit the slaughter market in May and June. For the long-term supply situation, we look at the breeding herd. The December 1 breeding herd count, at 1.1% under last year, was far lower than the average guess of a 1.0% increase. 

The other head scratcher here is that breeding animals on September 1 were 0.5% higher than last year. Essentially USDA’s survey showed a sharp decline in breeding animals over the past three months. This runs counter to sow slaughter in Sep – Nov, which was 6.4% smaller than last year. A smaller sow slaughter should have implied a good increase in the breeding herd. The three months of farrowings listed showed Sep/Nov -0.2%, Dec/Feb +1.3%, and Mar/May +1.4%. There is a six-month lag between farrowings (births) and when those hogs will be marketed. 

Summing up the whole report, we will say USDA found a smaller hog herd than the trade had anticipated. The way the numbers flow, it would appear as though the smaller numbers were because expansion did not start in mid-2013. For those looking for a PED-based influence, USDA’s September–November pigs-per-litter estimate of 10.17 head was “only” 0.1% higher than last year. In the previous quarter, it was +1.6% vs. last year. For those looking for PED devastation, you will be disappointed. All the talk of “6 million pig deaths” or “slaughter declines of 2% to 5%” are not verified at all by these numbers. As it stands now, you could assume pork production in first half 2014 will run about 1% higher than last year (lower slaughter X higher weights), then shift to a 2% to 3% higher pork production in the second half. Keep in mind USDA’s December 10 estimate for 2014 was a whole-year increase of 2.9%. As it stands, we would say this market certainly should be bottoming right now and the process of slightly higher prices into spring should be seen.
Working Trade:
  • (11/18) Sold 1 Feb 86.00 put 1.27, risk to 2.27, objective 0. Closed 2.12.
 
 
Rich Nelson 
Allendale Inc. 
815-578-6161
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