Monthly Market Profile: Punching water

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No matter whether you’re a trader, producer, end-user, or maybe just a casual observer, and regardless of whether you’re bullish or bearish, it’s likely your primary focus in recent weeks has been on the corn market.   Tight supply and wide-spread uncertainty led to anxious anticipation of USDA’s May WASDE report:  ‘10/’11 updates coupled with initial ‘11/’12 estimates provide some type of short-run baseline from which the market can work.  The reports were especially timely given the preceding week’s commodity sell-off. 

This year’s carryover was adjusted upwards to 730 mil bushels.  Meanwhile, USDA’s first stab at next year’s carryover put ending stocks at 900 mil bushels.  However, as alluded above, USDA’s numbers serve as a guide.  The reports generated a large amount of skepticism among analysts.  Regardless, carryover is precarious; absence of buffer within the complex means the market will likely be very active in the weeks and months to come.  There remain a number of uncertainties going forward with old-crop and new-crop stocks more tightly coupled than ever before.  

First, old crop:  threat of supply depletion is very real.  That is, some end-users may potentially have trouble securing inventory in the late days of summer.  As such, the market must work higher to ration demand to avoid unforeseen supply interruptions (not to mention some logistical challenges that may endure because of flood damage to grain handling and transportation infrastructure).   Moreover, the longer that marketing rationing is delayed the more aggressive summer procurement scurrying will have to be to match inventory with end users.   That said, trade will actively position around and look to USDA’s June 30 grain stocks report.    

Second, new crop –this year’s planting endeavor is critically important with acreage and yield being the primary focus in the weeks to come.   The matter of acreage is especially tentative given this year’s weather scenario.   USDA’s WASDE report did NOT ratchet back the agency’s initial spring acreage projection.    Therefore, ‘11/’12 carryover is predicated on farmers planting 92.2 million acres.  However, USDA did dial down their initial yield estimates.    Those discrepancies invite several questions going forward.   One, will all those acres actually get planted?  Two, given the delayed planting dates will harvest rates run at historical averages?   It’s one thing to get the crop in the ground, it’s another to get it harvested; late planting dates also create problems on the other side of the growing season.    

There also remains the ongoing calculus surrounding yield.  And there’s a number of varying interpretations within that realm.   One, yield estimates are partially an artifact of an expanding acreage base – the margin comprised of less-productive land; therefore, reallocation from corn to alternative crops due to late planting will actually aid in propping up yield average (that’s NOT to say there’ll be more corn – just the average yield will be supported).   Conversely, on the other hand, weather conditions at planting and the extended outlook are not supportive to yield deviations.  What crop does get planted will increasingly be planted in difficult conditions (i.e. mud), consist of short-season corn with lower yield potential and crop establishment will be threatened by cool, cloudy, wet weather conditions (at least at the outset especially in the eastern corn belt states).        

Bottom-line, despite somewhat higher-than-expected carryover estimates, stocks-to-use remains historically tight.   It’s increasingly clear rationing must being immediately; old versus new – it doesn’t matter – the market must now work towards ‘12/’13.  The ‘11/’12 marketing year won’t advance carryover to any significant degree, especially in light of ongoing weather challenges and likelihood of the  supply/demand estimates reflecting decreased planted acreage. 

As mentioned last month, “However you look at it, given the demand structure for corn, one year is no longer sufficient to dig out of the hole.”  (The situation reminds me of a recent Southland episode entitled, “Punching Water”:  you can punch water as hard as you want but it won’t make a dent.)   Bottom-line, get ready for lots of volatility going forward – corn’s new normal.       

Turning our attention to cattle; perhaps this month’s theme might appropriately be phrased as, “some softening finally occurs.”   There’s been lots of concern about the recent market reversal – phrases like “hitting the wall” or “falling off a cliff.”   But those are likely overstated with respect to consumer demand.   No doubt, there’s some consumer resistance with regard to pricing and pull-through; fuel prices, unemployment and home values continue are enduring themes regarding consumer behavior.    That underscores the need for ongoing vigilance.   Recall also, though, that last month’s article noted that the cash market was working higher during early April while the futures market was beginning to anticipate lower prices ahead.    Therefore, the spring top was likely in place and price reversal was not unexpected.  

That brings us to the second theme, though:  placements.   This year’s cattle-on-feed inventories continue to run well ahead of last year’s totals.    As explained in January, “…higher markets and better sales have altered risk tolerance among feedyard managers.”    That theme endures.   And throw in the southern drought on top of that.  Cattle feeders have been active buyers of the available pool of replacements.  The April-1 6-month running placement total is nearly 550,000 head larger than last year (see graph below).    That has dual implications:  first, it means collective work ahead for feedyard managers; second, coming full circle, feedlot inventory further confound USDA’s usage estimates for the final six months of the corn marketing year and underscore potential for market volatility.   Stay posted! 

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