Report Overstated Bear Case
is a special comment on the Jan. 12 USDA report for
was made by the media and markets last week that the
USDA numbers dramatically increased corn yields and
supplies and that we are swimming in corn barring a
glut. This could hardly be any further from the truth.
The headline number that got the large speculators to
panic sell yesterday was the two bushel per acre increase
in yields which only put the yield number back to what
it was in October. What was absent from the media reports
was that demand was also bumped up by 140 million bushels
mainly from an increase in feed demand. This primarily
negated the increase in yields and only bumped up ending
stocks by a miniscule 90 million bushels.
you believe the yields from the USDA in yesterday’s
report, this still puts the stocks to usage ratio at
the second tightest this decade in the U.S. When one
looks at the global stocks to usage ratio base upon
yesterdays report the stocks to usage ratio is the lowest
since 1974. This is hardly bearish and in fact is an
extremely bullish supply/demand situation for 2010.
Remember that the increase in feed demand is a very
telling story that the USDA is seeing greater and is
expecting to see greater consumption. Why? Lower test
weights have been reported as a consistent dynamic throughout
harvest and such lower test weights mean greater needs
to feed more corn to supply the same protein value than
if the test weights were more normal. I expect that
in the March and June grain stocks report that the USDA
will likely lower significantly grain inventories to
adjust for the lower test weight issue.
also find it very interesting that the USDA raised its
own estimate for corn cash prices by 15¢ per bushel
to range in the $3.40 to $4.00 range. Current spot cash
prices in many areas of the Corn Belt are already near
the lower side of this range. So why did they raise
prices when supposedly we have a glut of corn according
to media reports and large speculative fund panic selling?
It sounds as though they have become more bullish on
is even more interesting is that the USDA shortly after
issuing the report came out with an official press release
indicating that they were going to release an additional
supply/demand, corn stocks and yield report on March
10 due to a significant number of unharvested acres
that existed in late November which was the basis of
this report’s conclusions. They suggested that the unharvested
acres at the time were included in the Jan. 12 numbers.
They also suggested that respondents to the first survey
would be recontacted/resurveyed as up to 1.5 billion
to 2 billion bushels of corn were simply stated in the
current report as a "best guess". They further
indicated in the report that North Dakota and South
Dakota would not be resurveyed as weather remained too
unfavorable to get a good number. In these two states
a good number would not be forthcoming until after March
in all one should read the USDA's press release as an
admission that they are not entirely confident that
the Jan. 12 report is a reliable number. As such, one
should view the current USDA report with great skepticism.
Majority of grain elevator surveys and farm surveys
that I have seen from respected private outfits show
yields well below the 165/bushel mark. Many have yields
say I am disappointed in last week’s outcome is an understatement.
I did not think that the USDA would come out with the
numbers that they did. However, when looking under the
surface with USDA admitting that insufficient data was
available for the Jan. 12 report, their decision to
increase the feed demand numbers materially as a first
indication of lower test weights and the increase in
their corn cash price estimates, I remain as bullish
as I was before the report.
a sense, the USDA simply punted this report further
down the field to March 10 and left the numbers fairly
unchanged overall. Short term the large speculative
funds have a margin call problem that must be resolved
before corn prices and the corn bull spreads can firm
up again. This margin call selling cleansing process
usually takes 2 to 3 days to resolve. I would expect
most of this pressure to subside by week’s end and to
see a more bullish reassessment of the corn market sometime
next week. This is a great buying opportunity for the
July 2010/December 2010 bull spread which has backed
up to the prime accumulation range of -13¢ to -15¢.
you are an end user of corn than this will likely be
your best opportunity to buy cheap corn for the better
part of the year. This trade was recommended in a January
Market Strategy article. The violent nature of the move
following the USDA report highlights the advantage of
entering bull position on a spread.
I am a humbled bull as the USDA hit me with a stiff
uppercut but, taking the emotions out of the equation
and looking at the situation by the numbers and rationally,
I remain an adamant bull on this market and especially
the bull corn spreads at current discounted levels.
I had thought there was the potential for a more explosive
move in the corn price and the corn bull spreads but,
given the delayed harvest and longer time to factor
in lower test weight data against a psychologically
bruised market at the moment, this process appears that
it will take a more gradual maturation form from here.
Hackett, commodities broker and author of the Hackett
Money Flow report newsletter (hackettadvisors.com),
is a nationally recognized agricultural commodities
expert with more than 15 years of money managament experience.