More market questions than answers-Bryan Doherty
Last week's quarterly Stocks and Acreage report probably shed more doubt and question on current supply and expected acreage than provided answers. Shortly after the report, the USDA did indicate they would re-survey South Dakota, North Dakota, Minnesota and Montana. Results of these acreage surveys will be presented in the August 11 Supply and Demand report. Many have asked us why they are not going to re-survey Ohio, Indiana and Michigan. We don't have that answer, though it seems a valid question. Perhaps even more important are questions surrounding the quarterly stocks figure. A basic law of economics would suggest that high prices cure high prices. All else being equal, quantity demand decreases in a higher priced environment.
Since 1996, the largest variance prior to 2010 on the June Quarterly Stocks report was a decrease of 162 million bushels in 1996 and an increase of 103 million bushels in 2008. In 2010, the USDA subtracted 303 million bushels in June and eventually added this back onto the September report. 2011 is an interesting figure at an increase of 346 million. So what may have happened to cause such a significant increase?
One theory is simply that high prices lead to less usage. We accept this idea, in part. Corn feed usage may have declined due to other suitable feed items such as wheat. Yet, all feed grain consumption for the third quarter was down 46%. In the prior two quarters, feed and residual usage was up 8%. For corn, a decrease of 44% was noted through the March/May period. Therefore, in an environment where livestock numbers appear to at least be steady (if not growing) it's easy to ask: What are livestock consuming? Keep in mind that the window of survey time was March through May, when most of the country has sparse pasture available. Dry weather in the South also made pasture conditions and winter wheat grazing challenging.
On the September Stocks report, the USDA indicated the increase in stocks was due to the idea that the June report reflected corn in transit. With significant flooding along rivers, we think one plausible theory is that corn this year was backed up in commercial storage, and therefore, not in transit. This would account for such a large and significant increase over such a short period of time.
Whether or not this theory has validity remains to be seen, though it wouldn't be a shocker to see a downward adjustment in stocks on the next quarterly report. At a minimum, it might be safe to say that we are beginning to get used to such wide swings and surprises.
One last thought; if stocks are reduced on the next quarterly report, this could leave carryout back down somewhere in the range of 700 or 800 million. With a questionable spring and crop ratings that currently indicate about 30% of the crop rated as fair or less, the bull market for corn may be alive and well, taking a pause before its next leg higher. Of course, weather and other outside influences, such as China's needs and world wheat crop conditions, will have influence as well. Feed buyers should be on the alert, and if weather conditions over the next few weeks suggest anything less than ideal, prices could rally. The idea of a lower stocks figure on the next report (compared to the June report) could gain traction as well.