The USDA again managed to surprise analysts and traders alike with their stocks in all positions report last month, leaving us to ponder the reason for the much larger than expected stocks of corn and disappointing numbers in wheat. September 12th corn stocks came in at 920 million; however that figure climbed to 1128 million September 30th. This number was higher than the most bearish pre report estimate. After the shock, traders remembered last years’ report which was just as much of a surprise and was later explained as containing early harvested new crop corn as well as on hand old crop.
The roller coaster created by the 2010 September stocks report and the October report last year which clarified the situation, was quite a ride! Were we looking at a repeat of last year After further study of the report, it appears that was not the case. The increase in stocks came from a reduction in demand not an increase in supply as it had the previous year. Although cattle and hog numbers exceeded last year during the same quarter, implied feed usage fell 39 million bushels below last year and 228 million bushels below 2009. One must also consider that the July-August time frame reported a large number of low weight cattle put on feed due to drought conditions in Oklahoma and the Texas Panhandle. Many of these cattle were reported to have been moved north to feed lots not only for availability of feed but also to escape the extreme heat. Since feed usage in wheat did not seem to explain the higher corn stocks for this time frame, the concept of substitution of wheat for corn is in debate. Distillers grain, the residual of ethanol, may not have been properly reported as feed use therefore accounting for the lower corn usage. Cattle moved into northern locations may also be fed by wheat coming in from Canada. Logistics and favorable transportation are all part of the bottom line.
The October production and supply/ demand report had some positive news on domestic corn supply, reducing harvested acreage due to late spring flooding. The 60 million bushels lower than expected production was somewhat offset by a reduction of 50 million bushels in exports to 1.6 billion which is a nine year low Yield was left unchanged. World ending stocks were adjusted to 123.2 million tonnes from 117.5 last month and 114.5 two months ago. The bull’s argument has already boosted the upcoming exports from China, projecting a need to restock corn supplies. The USDA revised China’s production to 182 million tonnes from 178 million in September. Shortly after the report the China National Grain and Oilseed information center pegged the production at 184.5 million tones. If one researches major Chinese US corn purchases over the last year and a half, the reality is that a good deal was done under $6.00 a bushel.
Russia’s claim to limit grain exports had little effect after the disappointing UDSA wheat report which took world wheat ending stocks to an 11 year high, plus a huge jump in world soft red wheat stocks. Let’s look at the US class breakdown. The hard winter wheat carryover was raised 26 million bushels to 298 million from 386 million last year. Soft red wheat was raised by 47 million bushels to a new record high of 244 million bushels from 171 million last year. The jump in US and world ending stocks were not anticipated.
Upon reviewing the latest report, the break in the wheat/corn spread may be justified. The break in the Kansas/Chicago wheat, however was merely the function of SOME rain in Oklahoma and the Texas Panhandle and parts of Kansas. The drought condition in this region may have weakened somewhat, but has not disappeared. The ending stocks figure for the two classes still supports the spread. I seem to be 0 for 2 on this spread and in retrospect it seems to be my choice of entry, Simply put this last attempt I recommended a 70 cent KC over Chicago entry, while major support seems to be 50 cents.
What is it that we are always reminded of ” timing is everything” unless you have conviction and deep pockets
Next, Long December of 2012 corn/ short July of 2012 Contact me for game plan.
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