(Reuters) – At just over 2 billion bushels, this year’s projected U.S. corn carryout would be the largest in a decade and would represent more than 50 days of use. But as imposing as that supply total may appear, upturns in domestic demand are already underway that should draw down those inventories at a steady pace and serve to underpin corn prices going into 2015.
Indeed, the U.S. Department of Agriculture has dialed up total U.S. corn demand by 275 million bushels (2.1 percent) since June on the back of improved end-user margins fueled by multi-year low corn prices, and looks set to increase demand further going forward should domestic ethanol production continue to increase.
The strong commitment by farmers to store rather than sell their corn is another factor likely to offer price support going forward, although the fact that those stores of corn must eventually be offloaded onto the market may ultimately cap any demand-led price rallies regardless of how strong consumption gets over the near to medium term.
PROMISING TRENDS
Corn market participants have been rightly preoccupied for the past several months with chronicling the development of this year’s record-setting U.S. crop, which is set to top the 14 billion bushel mark for the first time.
But just as this year’s bumper crop rounded out the growing season and started to get harvested across the country’s top growing regions, end-users of the grain dialed up their purchases and consumption of corn amid the friendly price environment that prevailed in late summer and early autumn.
Projected corn use by livestock feeders, the largest corn user group, is up 125 million bushels from the June estimate as a combination of firm cattle and beef prices alongside weak corn values boosts cattle production margins and promotes herd expansion.
That said, widespread pasture availability across the U.S. Plains and Mid-South has so far kept overall corn feed purchases in check by allowing ranchers to keep their herds out grazing for longer, although once the winter sets in the flow of cattle through corn-dependent feedlots is expected to pick up.
Profit margins for ethanol producers – the second biggest corn user group – have also widened lately, which is expected to promote a further expansion in corn-based ethanol production for the remainder of the year.
The USDA already raised its corn usage projections from the ethanol sector by 25 million bushels in its latest assessment, which marks a 100-million-bushel rise for that demand source since June. But additional increases to ethanol’s corn consumption could well be on the cards by year-end should plant operators crank up output as expected over the remainder of the year.
Should this increase in corn purchases from ethanol traders lead to heightened competition with feedlot purchasers, corn prices could well gain some sustained upside momentum, especially if overseas purchasers also enter the fray and lead to firmer U.S. export orders.
The USDA has lifted U.S. corn exports by 50 million bushels since June, but has opted to hold its target rate flat for the past three months amid a fairly quiet spell on the shipments front.
That said, a major reason for the recent lackluster tone in the corn export market has been the overwhelming focus on soybeans, which have taken precedence in most export channels as international buyers work to restock supply pipelines.
But once the initial waves of fresh soybean supplies have been dispatched, corn is expected to take up a growing share of the supply flow and should see a notable uptick in purchase orders before year end as exporters move to line up cargoes.
INVENTORY ANCHOR
As promising as the demand outlook may seem going forward, the upside for prices could prove to be limited by the amount of corn stored away in on-farm storage facilities this autumn. Cash-rich growers across the Midwest have grown accustomed to corn prices in the $4-5 a bushel range and so have been unimpressed by the recent slump in cash values into the low $3 region in recent weeks.
Rather than merely accept that relatively poor market price for their crops, many growers have opted to lock their grain away for a few months in the hopes that prices rebound into profitable territory.
History has shown that such a storage play can pay off handsomely, so several growers seem committed to playing that game once again in 2014/15.
However, the fact that so many growers are all storing a huge chunk of the national crop this year means there is likely a limit in how far prices can rise before bursts of farmer offloading eventually caps the market.
Further, corn buyers are fully aware that farmers will be forced to sell off most of their supplies ahead of next year’s harvest, and so will not easily be lured into chasing any rallies in the interim.
This especially applies to international consumers who are also mindful that around a third of all corn exports can be acquired from Southern Hemisphere growers who operate off a different rhythm and cost structure than their North American counterparts and so may be forced to offload sales at prices below where U.S. growers are prepared to sell.
This means that American growers could well be undercut by overseas rivals if they hang on to their supplies for too long, and so need to look beyond their own stockpiles within their farm gates and make sure they exploit pockets of firm demand with timely sales while they can, even if prices are not quite what they would like.
