Is the rationing process working for corn?

(Futures Mag) – We’ve used the term “abysmal” — or the like — to describe U.S. export sales for the 2012-13 marketing year, and we’re running out of adjectives. Over the past two months, the combined weekly readings for the current and next marketing year have been close to zero. To reach even the USDA’s rather low forecast of 29 million tonnes for the year, average weekly commitments would need to be in the 500,000 to 600,000 tonne range.

Year-to-date commitments stand at 12.77 million tonnes, down 49% from last year at this time, and are at their lowest level for this time of year since the USDA started keeping track in 1987!

Traders have watched incredulously every Thursday morning as the USDA weekly commitments report has continued to show almost no overseas sales, but reasoned that foreign customers were still recovering from sticker shock and but would return sooner or later. Prices have fallen by as much as $1.50 per bushel since they peaked in the summer, but there is still nothing happening.

While the silence on the U.S. export front in itself would seem to be a clear indication that the rationing process is working by curtailing demand, the market’s reaction to a slew of USDA data on Jan. 11 actually sparked a rally.

First, the quarterly stocks report showed U.S. Dec. 1 inventories at 8.03 billion bushels, 250 million bushels (6.4 million tonnes), below the average guesstimate. This means that domestic consumption has been running at a much higher rate than anybody believed. The lower stocks figure was certainly not the result of the exports.

In the monthly crop report, the output estimate for the U.S. crop harvested this past fall was raised by 55 million bushels. The export estimate was slashed by 200 million bushels, to 950 million bushels (24 million tonnes). No surprise on that front considering the sorry state of export commitments, as discussed above. That would be the lowest export total for the U.S. since the 1971-72 season. Between the output and export revisions, the monthly update would appear to paint a fairly bearish picture. After plugging in the information from the quarterly stocks report, though, the domestic feed estimate was raised by 300 million bushels, which actually made the report look bullish.

The estimate for 2012-13 ending stocks surprised traders, who were expecting a small increase in the estimate, to 667 million bushels. Because the increase in the domestic feed estimate was larger than the drop in exports, the revised figure for ending stocks came in at 602 million bushels (15.3 million tonnes), down from last month’s 647-million-bushel estimate. We are assuming that a rationing process is now balancing the market. If this report is anywhere near accurate, we are still very far from accomplishing that. Before the drought hit, estimates for U.S. ending stocks were close to 2 billion bushels. Rationing does not seem to have accomplished very much, so hence the rally.

The production estimates for South America were very bearish. The average guesstimate for Argentinean output was 25.9 million tonnes, down from the previous month’s estimate of 27.5 million tonnes, but the estimate came in at 28 million tonnes. The Brazilian estimate was expected at 70.25 million tonnes, up slightly from last month, but came in at 71 million tonnes. More recent estimates are looking for even higher output numbers for Argentina and Brazil.

Despite the non-existent U.S. exports, normally a harbinger for global demand, the USDA raised its estimate for global demand by close to 6 million tonnes. The estimate for global ending stocks was revised down to 116 million tonnes, or 13.3%, down from 13.6% last month, and down from 15% at the end of 2011-12. That’s the lowest carryout since the 1973-74 season.

If adhered to, our recommended stop on long positions at $6.95 per bushel, basis the nearest contract, was breached. (See Focus on Futures, November 17, 2012.) We are hesitant to recommend reestablishing long positions, mainly because if the U.S. does not start selling some corn overseas, the market would have to fall to bring those buyers back. The rally is treading on very shaky ground. If you’re not already stopped out, the $6.95 stop should be strictly honored.