Reviewing the report
Let’s take a moment to review today’s numbers as well as look ahead given our new information. Trade was looking for a slight reduction in production but instead saw a production increase of 55 million bushels. From the supply side alone, this would appear to be a bearish report so let’s look into the details of demand. Exports were reduced 200 million bushels which is also a bearish number on this report. Trade was well aware that exports have been a real problem lately so it was nice to see the USDA realize this right away. Another surprise seen today, other than the production increase, was that ethanol demand was left alone. Ethanol has certainly been having demand problems along with the exports but the USDA did not make any changes to that ethanol number yet. Seeing no change in ethanol is concerning given the recent drastic slowdown below expectations. While trade recognized problems with exports, they did not recognize the same problems with ethanol. What turned this report bullish for carryout was the feed/residual number. That demand number was raised 300 million bushels which turned what would have been a bearish report into a bullish for carryout. Total carryout fell from 647 million bushels last month down to 602 today. In the past, that feed/residual number has been known to move around freely and should be watched with caution on future reports. More bullish support was seen from the quarterly stocks report. Trade was looking for quarterly stocks of 8.219 billion bushels and the USDA put out a 8.030 billion bushel number. That means, once again, trade missed the quarterly stocks number by a large amount, 189 million bushels. It is common for this number to come in smaller than expected during early harvest years. Given this new carryout number the economic value for corn is now raised to 750 for March corn. We will look for this corn to hold at least 720 with the high potential of 780. Right now the long term downtrend in March corn crosses just under that 750 level offering another reason why making some cash sales would be tempting at that level. To keep this bounce going next week we need to have the bulls talking about a pickup in exports due to the lower carryout. It shouldn’t take long on Monday to see if we find that talk or not.
- Stand aside
Lean Hog Commentary
This week was a tough one for the hog industry. We computed that the previous two weeks of holiday and storm related slaughter numbers left us with 100,000 head to fit into the short term slaughter market. You can write off these issues as being shorter term problems that will be taken care of by the end of the month. Today’s supply/demand report revised the 2013 pork supply quite a bit higher. After reviewing the December 28 Hogs and Pigs report USDA revised its 2013 pork production estimate from a 1.7% decrease to now a 0.2% increase. For tonnage, an extra 510 million lbs. was added. This is a big increase to swallow from last month. On top of that, chicken production was increased by 351 million and turkey production by 207. In essence USDA just added 1.3 billion lbs. to its total meat supply estimate from December 11. Wow. On the pork supply issue specifically we have previously noted our skepticism with the future intentions implied. From September through December, producers lost an average of $38.87 per head on marketed hogs using Iowa State’s model. It is hard for us to suggest producers did not react to these numbers. For price outlooks before this week we had suggested February and April were at value. With this week’s lower trade factored in they are now under value. Though this week’s price move was a surprise, the option positions below remain in profit. A serious look at going outright long will be discussed next week.