Welch on Grain: Record Corn Supply and Use Estimates

    Market Situation

    USDA Agricultural Outlook Forum. The “Grains and Oilseeds Outlook” presented last Friday at the USDA Agricultural Outlook Forum contains record corn supply and use estimates. This first forecast for the 2014/2015 crop year, as stated in the introduction, is based on normal weather conditions for spring planting and summer crop development (Full report).

    A corn crop of 13.985 billion bushels is projected from 92.0 million acres and an average yield of 165.3 bushels per acre, an all-time record high corn yield. Combined acres of corn, soybeans, and wheat are down 1.1 million from last year, the same amount of the forecast increase in cotton.

    Corn use, also a record, is forecast at 13.380 billion bushels. The increase in ending stocks of 630 million bushels to 2.111 billion, is about the same as the increase estimated in the current marketing year from last (+660 million bushels). The resulting stocks to use ratio would be 15.8%, the highest since 17.5% in 2005/2006.

    Corn Use. Recent reports related to corn use in the current marketing year continue to reflect strong consumption patterns.

    Friday’s Cattle on Feed Report showed higher than expected placements resulting in a cattle on feed number 3% below last year. This number was 5% below on feed numbers in January. Corn marketing year to date, cattle on feed inventories are 5% below a year ago and the 5-year average. Broiler chick placements continue to run about 2% above a year ago and just below average levels.

    The February Short Term Energy Outlook from the Energy Information Administration shows ethanol consumption so far this corn marketing year 5% above last year and 4% higher than the 3-year average. Ethanol production is 8% above year ago levels and 3% above average.

    Corn export sales just passed the mid-point of the marketing year stand at 1.390 billion bushels, 87% of the marketing year projected total of 1.6 billion bushels. The pace of sales necessary to reach USDA’s target is 7.5 billion bushels per week.

    Outside Markets. From IHS Global Insight:

    Bad news on the housing market, but how much is due to weather? Housing starts fell 16.0% in January, to 880,000. This is likely weather-related, as the largest drops occurred in regions with particularly frigid or snowy conditions. However, single-family building permits slipped 1.3% and appear to have hit a plateau. In order to break free of it, homebuilders need more developed lots. Fortunately, lending standards for development loans are starting to ease. Meanwhile, existing home sales fell 5.1%, to 4.62 million units (annual rate), the fewest since July 2012. Weather was undoubtedly partly to blame, but according to the National Association of Realtors, a lack of inventories was another important factor.

    A strange month for the Producer Price Index; consumer prices remain quiet. The final-demand Producer Price Index rose 0.2% in January, with final-demand goods up 0.4%, thanks to food, heating fuels, and drugs. Producer prices are now reported with a new aggregation scheme that includes services, but the chronic anomalies of the past still roil the data. Core goods prices rose 0.4%, as a chronic January adjustment issue in pharmaceuticals bloated the number. But the core goods spike has all the makings of a one-off oddball month. Meanwhile, CPI inflation remained fairly quiet in January. The headline and core CPI both rose 0.1% month on month and just 1.6% year on year.

    Up next week: GDP, consumer sentiment, new home sales, and durable goods orders. Fourth-quarter GDP growth is expected to be revised down from the 3.2% rate initially reported to 2.4%. Weaker consumer spending, goods exports, and inventory accumulation, as well as fewer goods imports, more than offset stronger business equipment spending and housing activity. Beyond GDP, we will be looking for weather impacts in the economic data. New home sales are expected to have fallen 1.4% in January because of decreased buyer traffic. We are assuming this is largely weather-related. Durable goods orders likely slid 2.7% in January, probable payback for a December surge in aircraft orders. And the Conference Board’s Consumer Confidence Index likely shed 1.1 points to register 79.6 in February, but a late-month update to the Reuters/University of Michigan index should put that measure marginally above its January level.

    Marketing Strategies

    2014 Corn Marketing Plan.

    I am ready to price the first 20% of 2014 production, using technical tools to time this sale. In a trending market, two such tools are moving averages and Moving Average Convergence Divergence (MACD). With moving averages, a sell signal is generated when

    Price<4-day moving average<9-day moving average<18-day moving average.

    A sell signal using the MACD histogram occurs when the divergence of averages changes from positive to negative. Neither tool triggered a sell signal on today’s close.

    If we are moving from a trending market to a sideways price pattern, tools such as stochastics or Bollinger bands may be more appropriate.

    Upcoming Reports/Events.
    March 28 – Quarterly Hogs and Pigs
    March 31 – Grain Stocks, Prospective Plantings

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