USDA’s Grain Stocks report, released on Friday, was a pretty big shock to the grain trade as it indicated substantially larger Sept. 1 corn stocks than the trade expected. The key numbers for corn, soybeans and wheat appear in Figure 1.
USDA’s estimate that 1.128 billion bushels of corn remained in bins at the beginning of the month was 17% higher than the average pre-report estimate and was over 7% above the highest estimate offered by any respondent to Dow Jones’ pre-report survey. While still 34% lower than last year, the number represents 166 million more bushels available to corn users next year and implies that $7-plus corn did indeed ration uses during late summer months.
There will be a lot of opinions regarding just who it was that blinked in July and August. Margin estimates show that there was little reason for ethanol usage to fall. Weekly data indicate that the pace of corn exports, which had been lagging behind 2010 levels since April, lagged even further right at the end of the marketing year. This suggests that export buyers did indeed respond negatively to higher prices and the stronger U.S. dollar. But the weekly data say that exports finished the year higher than USDA’s September estimate of 1.65 billion bushels.
It is likely that the biggest adjustment to account for the higher stocks will be a reduction in feed and residual usage in USDA’s next World Agricultural Supply and Demand report to be released on Oct. 11. And that is probably reasonable. There may be more cattle on feed, but low-$7 Omaha corn meant high-$7 corn in the Southern Plains and High Plains feeding areas and cattle feeders have been tinkering with rations all summer to reduce costs. Lower chicken egg sets finally drove chicken slaughter below year-ago levels in July and, even though the birds remain large and there was an increase in wheat feeding the east and southeast regions, less corn was used in late summer. And, though hog numbers have remained roughly the same as expected, the reason for those light market weights in July and August was heat-induced reductions in feed intake.
What do the higher numbers mean going forward? That will depend on prices. Market participants will collectively decide whether stocks are sufficient to justify now-lower prices, and either use the product at these price levels or bid them higher in order to drive some of the newfound stocks to the bottom of the supply and demand chart – adding them, or a portion of them, to 2012 ending stocks. USDA’s most recent forecast of 672 million bushels in year-end inventories is low indeed. I think a portion of this increase in year-beginning stocks will fall all the way to year-end stocks. But lower prices will allow all users to buy more corn than they had planned as well, so there will be some balancing as the year progresses.
Sharpen Your Pencil, Chart a Course
To say the sell-off in corn futures has been dramatic is a colossal understatement. Figures 2 and 3 show daily December and July corn futures. It is hard to believe, but both of these charts are very near 50% retracements of the corn price rally that began back in July 2010. Lower oil prices and a dramatic shift in the investment community’s view of commodities, in general, are the primary drivers of the sell-off. But one thing is certain – it is providing a wonderful opportunity for livestock and poultry producers to manage costs all the way into 2013.
Figure 4 shows the costs and prices from my model based on Iowa State University (ISU) production parameters through the end of 2012. If your cost structure is close to that represented by the ISU estimates and you can realize the average Iowa-Minnesota basis of the past five years, you could have locked in profits of $13.22/head for all hogs sold in 2012 at Friday’s closing corn, soybean meal and Lean Hog futures prices.
And if you have sold cash hogs and bought cash grains this year and you lock in the rest of those costs for 2011, your average profits will be $6.54/head – the best 2011 estimate I have seen since last spring when corn prices were last at these levels and soybean meal was actually $30-$40/ton higher than implied by current futures prices.
To put it in perspective, look at Figure 5. Should Friday’s prices prevail, next year’s peak monthly profits will be almost as good as the best months of 2010, and there will be fewer months of losses.
There is a lot of water to pass under the bridge between now and the end of 2012. Many things could happen – both positive and negative. The correct course of action depends on your financial position, production parameters and attitude toward risk. Sharpen your pencil and chart out a course of action to take advantage of the profits being offered. Only five years since 1991 have been better than the figures say 2012 could be as of Friday’s close and one of those five was only $0.49/head better.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.