Corn Prices on the Defensive
The USDA's May WASDE report released on May 9 projected that stocks of U.S. corn at the end of the current marketing year would total only 1.146 billion bushels, about 100 to 150 million bushels less than generally expected. Since the release of that surprisingly small forecast, however, corn prices have declined about $0.40 per bushel.
The price decline has come in spite of some supportive fundamental developments. The current pace of ethanol production, for example, exceeds the pace needed to consume the projected 5.05 billion bushels of corn for the marketing year. If ethanol production during the final 16 weeks of the marketing year persists at the rate for the week ended May 9, corn use would exceed the current USDA projection by 25 million bushels. The continuation of historically large ethanol crush margins should be supportive of ethanol production, but the magnitude of ethanol exports relative to imports will likely determine the level of domestic ethanol production over the next four months.
Similarly, the weekly rate of exports and export sales of corn continue to exceed the pace needed to reach the USDA projection of 1.9 billion bushels for the marketing year. The market, however, seems to reflect concerns that actual export shipments will fall short of 1.9 billion bushels.
Finally, record-large livestock feeding margins and low corn prices relative to other feed ingredients should be supportive of feed use of corn. However, feed and residual use of corn is only calculated on a quarterly basis with the release of the USDA's Grain Stocks report. Since calculated use is not always consistent with feed use expectations, the market is expressing some caution about the June 1 stocks estimate to be released on June 30.
The recent price decline appears to reflect a combination of declining wheat prices and prospects for a buildup in corn stocks during the 2014-15 marketing year. July wheat futures prices at Kansas City (hard red winter wheat) have declined about $0.90 per bushel since May 6. The USDA's May winter wheat production forecast exceeded market expectations, and concerns about the impact of extremely dry weather on the size of the hard red winter wheat crop have likely peaked.
Prospects for a buildup of corn and total feed grain stocks during the upcoming marketing year center on the U.S. The USDA's initial forecasts for the 2014-15 marketing year for the rest of the world are for a smaller feed grain crop than produced this year and for a drawdown in the level of stocks. The foreign corn crop is expected to be about the same size as this year's crop with no significant change in the level of ending stocks. Exports of both corn and total feed grains from non-U.S. sources are expected to be slightly smaller than exports projected for the current marketing year.
Projections for the U.S. corn market include expectations of a crop slightly larger than the record crop of 2013, a decline in both feed and residual use and exports, and a year-over-year increase in ending stocks of 580 million bushels. The market was surprised by the forecast of declining consumption and the resulting size of the expected buildup in year ending stocks. Prospects of a record-large crop and record livestock feeding margins created expectations of larger feed and residual use of corn next year rather than smaller use. Similarly, the projected year-over-year decline in Chinese corn imports was a bit of a surprise.