Shocking corn stocks
The USDA’s quarterly estimates of U.S. corn inventories have become a source of substantial surprises for the corn market. Dating from March 2010, 11 of the past 13 quarterly stocks estimates have deviated from expectations by enough to generate large price movements. During that period, USDA stock estimates have been both much larger and much smaller than generally expected.
Market participants form expectations for the quarterly stocks estimates based on the level of stocks at the beginning of the quarter and a projection of use during the quarter. Exports and domestic processing uses of corn during the quarter can be projected fairly closely. Projections of feed and residual use of corn are based on a variety of factors, including historical use, the most recent levels of use, livestock numbers, livestock feeding profitability, and likely levels of feeding of other commodities. Surprises in the USDA estimates, then, mean that feed and residual use during the quarter deviated from market expectations. Those deviations, in turn, alter expectations for feed and residual use for the remainder of the marketing year and the likely level of stocks at the end of the marketing year.
While it should be expected that the market will not always correctly anticipate USDA estimates, the recent pattern of large and seemingly alternating direction of the surprises in the quarterly corn stocks estimates is problematic. One of the results is a pattern of feed and residual use of corn that varies considerably from quarter to quarter and from year to year. That pattern can make it difficult to anticipate future feed and residual use and can result in wide swings in projections of feed and residual use for the marketing year or estimates for the previous year in the case of the September 1 stocks estimate. A number of examples can be cited, but consider the most recent experience. The smaller than expected estimate of stocks for September 1, 2012, resulted in the estimate of feed and residual use for the 2011-12 marketing year being increased by 162 million bushels. The smaller than expected estimate of December 1 stocks resulted in the forecast of 2012-13 marketing year feed and residual use being increased by 300 million bushels in the February 2013 WASDE report. That forecast was increased by another 100 million bushels in a rare change in the March 2013 WASDE report. Presumably, the projection will be reduced sharply in the report to be released on April 10.
The difference between the USDA’s March 2013 stocks estimate of 5.399 billion bushels released on March 28 and the average trade guess was about 370 million bushels, one of the largest differences in the past 30 years. Old-crop corn futures declined by more than 80 cents per bushel in the initial reaction to the larger than expected estimate. The dilemma now, however, is what to expect for the June 1, 2013 stocks estimate. The implied rate of feed and residual use of corn in the first half, and particularly in the second quarter, of the 2012-13 marketing year is quite low. The slow rate of feed and residual use does not seem consistent with livestock numbers, a sharp reduction in the production of distillers' grains, and the implied negative feed and residual use of wheat during the same six-month period. March 1 wheat stocks also exceeded market expectations by a large margin. Experiences over the past three years suggest that the June corn stocks estimate may “correct” for some of these apparent inconsistencies. If that turns out to be the case, the magnitude of the current price weakness may not be justified. Because the reasons for the sometimes large deviations between USDA estimates and market expectations are not obvious, the June estimate may or may not provide another surprise.