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Tuesday, January 17, 2012

What Is To Blame For The Recent Collapse Of Corn Prices?


The grain markets were rising from mid-December until the USDA’s Final 2011 Crop Production Report, Supply Demand Report, and Quarterly Grain Stocks Report, which were all released on January 12.  Declining yields in Brazil and Argentina had been pushing up values at the CME, until last Thursday, until the USDA released data that surprised the market.  Corn closed down the 40-cent limit, and both bean and wheat markets also collapsed with abandon.  Was the market drop the result of USDA finding a lot more available grain to supply the domestic and global demand, or was it the result of something else?

After closing limit down on Thursday and dropping another 12-cents on Friday, many farmers were less than pleased with the USDA’s numbers, wondering how they could be so much higher than what the grain traders were expecting.  But someone watching numbers for many years contends that USDA numbers were probably close to reality, and the traders who estimated what the USDA would say were more optimistic than they should have been.  University of Illinois grain marketing specialist Darrel Good says the surprises in the report would not have been such a shock, had the traders been looking for numbers that were closer to reality.  Consequently, he suggests that the traders were more to blame for the market declining than anything else.

In his weekly newsletter, Good says the December 1 corn stocks of 9.642 billion bushels were 425 million less than 2011, the least in five years, and only 240 million bushels larger than the average of the guess of the market.  He said even three of the 15 companies offering an estimate were in the neighborhood of what the USDA reported.

Good said part of the reason corn traders were surprised was that the stocks numbers were above their expectations, along with their expectations for the size of the 2011 corn crop.  He says the market does not have to offer any justification of why it thought there would be a 30 million bushel reduction in crop size, compared to the last estimate.  Instead, the USDA raised its November estimate by 48 million, which as only 0.4% larger than the November forecast.  He calculated the spread of the change as one-third of the surprise in the stocks estimate.

Good said the market was apparently looking for a high level of use that would correct the estimated use of the prior quarter, which the market thought underestimated feed and residual use.  He said when you consider the total use of corn during the September to December quarter, the percentage of total use was an unusually large 43.2%, which compares to a range of 38.2% to 40.7% over the prior 4 years.

Darrel Good says there are still problems with estimating feed use during a quarter along with the production of ethanol and the production of distillers’ dried grains that are also fed.  He says there is still no explanation for USDA’s sharp decline in feed use of corn, use of all grains, and all feeds per animal unit in the last half of the marketing year for the 2010 crop.

Grain prices, and particularly corn prices, collapsed after the USDA reported its final production estimates and stocks on July 12.  But, curiously, the market was expecting numbers that were not all that different from what was reported by USDA.  Nevertheless, the small increases were seen as negative by the market since it was expecting small decreases.  Since the USDA numbers were in line with its prior reports, the collapse of the market was more of a function of traders not guessing properly, instead of the USDA being incorrect in its estimates.

Posted by Stu Ellis on 01/17 at 10:37 PM | Permalink


The USDA reported bogus data...there should been a drop of at least 100 bu drop in US carry.Traders were correct, but the USDA (among other agencies) manipulate the market. (especially in the current admin.) The Feds will not listen to extension offices.

Posted by: Stacy Barendse at January 18, 2012 6:06AM

USDA is the Keeper of the Record. Whatever the Keeper of the Record says - goes. It is not a matter of being correct or not. It is just how the “game” is played. No matter how many calls the referee “blows” or number of great calls made, the game moves on to the next play. That is the way it is. Some have avoided direct contact with the Keeper of the Record by following the actions on the charts (technicians). (It becomes a little like watching “the game” on TV. You still yell at the screen for “missed” calls but it is not as frequent, loud or passionate as being there.) Anyone that has “played” with numerical projections knows the meaning of the phase; “Figures do not lie but figurers may.” It is difficult and may be self defeating to not include our biases in our projections. USDA is no different. Their goal may be something like; “We need to provide a “consistent” and “representative” view of the market place. That view needs to be “fair” to all market participants.” A more conservative approach may be presented to promote use and/or lower production. A more aggressive approach is used when the opposite is deemed to be needed. USDA’s bias sometimes shows up in the balance sheet after a stocks report - especially in the first quarter. Here the quarterly disappearances are interpolated into annual use projections. USDA for the current quarter appears to be in a more neutral posture for corn. Their annualized estimates appear “heavy” when total quarterly disappearance is reviewed but “light” when looking at the individual use categories. Ones own bias as to what the feed and residual use should be might provide a different outlook on USDA’s projections. (USDA’s current “Feed Outlook” does show the trend in feed and residual use for corn. USDA seems to be following that trend.) Corn prices are still relatively high, especially in the feeding regions of the south and southeast. Alabama feed mills are out bidding the Gulf for corn by $0.25 to $1.25 per bushel. (Yeah, that is corn as high as $8.00 per bushel on Monday. No wonder fewer broilers are being placed.) North Carolina feed mills are $0.40 per bushel over the Gulf for soft red winter wheat and around Gulf price for corn. So the feeders seem to be “at odds” with the exporters for supplies. Corn stocks are still very tight. Corn’s use for the current marketing year needs to be below last year’s use for supplies to “fit”. Unless more wheat finds a home in the feed bin and/or there is another good crop of “early” harvested corn. Sept “old crop” corn currently has a $0.20 per bushel premium to Dec “new crop” corn. This and potentially wider spreaders may prompt more “early” corn. (This may once again result in a “big” price drop as this fall’s September stocks report appears “too flush” and another drop in the following first quarter as folk’s expectations are not met. (Oh my, I do get ahead of myself.)) The decline in soft winter wheat planting this fall in the corn-belt states of Illinois, Michigan and Ohio (a decline of 550,000 acres) was almost replaced by increases in Georgia, Kentucky, Louisiana, Mississippi, North Carolina and Virginia (470,000 acres). The changes in soft red winter wheat plantings this past fall could mean: higher corn production if corn replaces wheat in the Corn Belt, more wheat should be available earlier with increased acres in the South and a chance for more double crop soybean (may be 150,000 more acres when all states are considered). So if it is not about right or wrong, than maybe it is about sportsmanship. I am trying to hold myself to a minimal outburst promise till the March 31st series of reports. I will allow a major tantrum if USDA’s February forum indicates that somehow those 3 million acres of prevented plant corn, that the “Put Sellers” are yapping about, makes it way into a projection of 95 million acres planted to corn this spring. Those that took prevented planting are using crop insurance as a tool as they should. It is no different than at least 600 thousand acres of the 5.9 million acres of winter wheat that were planted in Texas. Those acres went in on “a wing and a prayer” and crop insurance. When I asked a wheat grower about my theory he replied; “I am not 100% sure about “a wing and a prayer” but I can get crop insurance to pay.” Jib aka Gibberish

Posted by: Jib at January 19, 2012 7:07PM

PS It is going to be hard to get hard red winter wheat’s stocks to use ratio below 20%. We can plant 30.1 million acres, harvest 20 million and still have a ratio over 30% with a trend line yield. For soft red winter wheat, we could plant 8.3 million acre, loose the most acres to harvest that has been seen in recent history and still have a ratio of 65% with the worst yield in recent history. Hard red spring wheat is going to depend on planted acres. Anything over 11.5 million acres (should be doable) will make it hard to go below 20%. Wheat can be a partial substitute for corn in the country’s feed rations. The “high” price of corn seems to be “holding” wheat prices higher than wheat ending stocks indicate. One has to wonder how long that relationship will work with the UK exporting wheat to the Southeastern feed regions cheaper than it can be bought and shipped from the Midwest. One might also wonder; “How large does domestic wheat ending stocks need to become before they start to pull corn prices down?” Is that what USDA’s bias is trying to protect against?

Posted by: Jib at January 19, 2012 7:07PM

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