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How small is a small crop?

09/08/2011 @ 3:28pm

The above headline could sound wrong after Monday’s USDA crop production report.  But, for right now, the market seems to be trying to figure out how to survive in the face of smaller supplies.  

Just last year, for example, the carry-in plus the 2010 crop equaled 14.15 billion bushels.  This year, if the crop equals the average estimate of 12.5 billion bushels, total beginning supplies are only 13.5 billion bushels.  Less supply means less demand than previously thought.  Therefore, the corn market is dealing with a demand rationing situation.    

There is demand rationing taking place. Data regarding egg set and chick placement is released every week and shows a 6-7 percent reduction.  However, broiler weights are still above year ago numbers and a five year average.  Feed consumption may only be reduced 4 percent when weights are considered.  For the red meats, steer/heifer weights are slightly higher than year-ago and hog weights are slightly lower.  Milk production is higher than a year ago, too.  

If only the chicken producer is cutting back, is this enough rationing?  There continue to be reports of Canadian feed wheat being purchased for hog and chicken feed.  This could be the way the poultry and hog industries survive in the face of lower corn supplies.  Although this is price negative in the short term, the long term survival of the livestock industry is key.  Corn feed use can rebound quickly if a larger crop is grown.  

The other big user of corn, ethanol production, has been chugging right along.  Similar to livestock producers, ethanol plants have been able to lock in their production margins and are grinding corn profitably.  This apparently can continue for several months, so if rationing is required, when does this happen?  And at what price? 

The risk of loss in trading commodities can be substantial.  You should therefore carefully consider whether such trading is suitable for you in light of your financial situation.


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