CME: August Ending Stocks Will be Lowest in Years

US - With all the fireworks in equity markets, it is difficult, and daunting, to step back and focus on the fundamentals in grain and livestock markets, write Steve Meyer and Len Steiner.
calendar icon 10 August 2011
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But there is still a corn crop that waits to be harvested and, sooner or later, markets will have to deal with the upcoming harvest as it will dictate how grain and livestock prices will trade for the next 12 months.

We get one shot a year at building supplies and the job this year will be even more difficult considering that by the end of August, ending stocks will be the smallest they have been in years.

USDA will release on Thursday its monthly estimates of yields, production and ending stocks for corn and other crops in the 2011-12 marketing year.

A Dow Jones survey of 23 analysts shows that on average they expect corn yields for the upcoming harvest to be about 155.2 bushels per acre while total production is pegged at 13.083 billion bushels.

The chart shows how the surveyed analysts fall along the distribution range. Current analyst estimates compare with the USDA July estimate of corn yields at 158.7 bushels per acre and total corn production at 13.470 million bushels.

If we were to plug in the expected trade estimates for yields and production and leave everything else unchanged, ending stocks for the new marketing year would be just 423 million bushels or 3.1 per cent of total use.

This implies that higher prices will be needed to ration expected use and force end users, be this livestock and poultry producers, ethanol plants or world grain buyers, to pull back and limit their corn purchases.

It is not at all clear as to whether USDA will abandon its yield projections given its current methodology for estimating yields in August.

While analysts surveyed probably are taking into account the potential impact that hot weather had on corn during pollination, USDA August yield projections generally reflect estimates of stalk counts and use average ear counts and weights to calculate yield per acre.

By some estimates stalk counts are higher than a year ago, a function of improvements in technology. This would imply that any potential heat damage will not be reflected in the yield estimates until actual harvest results begin to trickle in.

Corn crop conditions have deteriorated since the beginning of July and the Monday crop progress report showed that 60 per cent of the corn crop is in good/excellent condition, two points lower than the previous week and much lower than a year ago when 71 per cent of the crop was rated good/excellent at this time.

Trade will continue to focus on any further deterioration in crop conditions, particularly in areas that traditionally have high yields, such as Iowa.

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