(Agrimoney) – We’ve all done it, stuck our necks out in the wrong direction.
And it looks like that’s what US farm officials did too, last month, when they raised their estimate for use of domestic corn in 2014-15 by livestock producers.
Many at the time questioned the 50m-bushel upgrade, to 5.30bn bushels, in the US Department of Agriculture forecast for the amount of corn used in the so-called “feed and residual” category, taking it some 260m bushels higher than last season’s figure.
After all, even though US hog and broiler numbers are rising, in the cattle industry, the biggest corn user, feedlot populations are a little lower than a year ago.
And the sceptics gained some support for their cause last week, when the US said that its corn inventories, as of March 1, were more than 130m bushels higher than investors had expected.
With corn exports known, and weekly ethanol data giving a good idea of use of the grain by biofuel plants, lower-than-expected feed use emerged as the prime suspect behind the outsize inventories.
Thinking big
Thursday will see the USDA’s monthly Wasde report, in which it will factor in the stocks data – with the assumption, naturally, that the feed use will take a downgrade, and the estimate for inventories at the close of 2015-16 an upgrade.
But by how much?
The trade expectation is for the carryout stocks figure to be lifted to 1.85bn bushels, from 1.78bn bushels.
However, there are many, like Richard Feltes at Chicago broker RJ O’Brien, who say that an upgrade of a “mere” 77m bushels “appears small”, given that the March 1 stocks number implied corn feed use in the previous three months “tracking over 100m bushels below last year”.
“I suspect end-stocks may clock in comfortably over 1.9bn bushels,” Mr Feltes said.
The broker has in fact forecast the figure at just short of 2.00bn bushels, the top end of the range of market estimates.
Little by little?
However, even if an upgrade of that nature is warranted, would the USDA backpedal on its feed use upgrade quite so quickly?
Don Roose at Iowa-based broker US Commodities, has his doubts, even while sympathetic to the idea of an above-consensus stocks number.
“You can make an argument to take feed use down 150m bushels, but the USDA are unlikely to make that adjustment in this report,” Mr Roose told Agrimoney.com.
“They usually like to make adjustments a little bit of time,” to allow for updates, and indeed reduced the potential for u-turns which the USDA has a record of, to the main part, avoiding.
‘Has become more aggressive’
Even Terry Reilly, at Chicago-based broker Futures International, while noting that the “USDA has become more aggressive these days” in its revisions, doubted that the department would have the appetite – in one swoop – for the large cuts to estimates for feed use and exports which he believes are warranted.
“Maybe if the USDA only took the feed use estimate down 75m bushels, they might take the export figure down a bit too,” said Mr Reilly, whose own estimate for US corn exports in 2014-15 is 1.75m bushels, 50m bushels below the USDA’s forecast.
(In fact, the USDA raised its forecast for corn exports in last month’s Wasde too, to 1.80bn bushels.)
Corn vs DDGs
Conversely, Jerry Gidel, senior feed grains analyst at broker Rice Dairy, had some sympathy for the USDA upgrade to its corn feed forecast, even while himself forecasting an above consensus stocks number on Thursday, of 1.88bn bushels.
“They were in a situation in March where they reduced the estimate for use of corn in ethanol, because of a higher conversion rate of corn into the biofuel,” he said.
“That implied lower production of distillers’ grains,” or DDGs, a feed ingredient manufactured as a byproduct of ethanol output.
“The USDA simply accounted for the loss of DDGs by writing it back in the form of corn feeding instead.”
Timing affect?
Besides, it is not so simple to believe that, because reported stocks were higher as of March 1 than expected, that this means that feed use is necessarily down by the difference.
For a start, there are many observers who believe that the US corn harvest last year was larger than has been reported, a factor which could also explain the extra supplies.
And Mr Gidel said that pricing expectations can have a big impact too, with ideas of higher prices ahead encouraging users to snaffle up supplies ahead, “pulling stocks away from the elevators, where [the USDA] can’t get at them”.
Conversely, a bigger stocks figure could be a reflection that users “did not buy as much in the early part of the crop year”.
‘Getting a bit burdensome’
Whatever, the debate, and the relatively wide range of estimates for the stocks figure, reflect uncertainty among investors which would be reflected in prices, said Futures International’s Terry Reilly.
“It is a big report because of the range of uncertainty over the corn stocks,” he told Agrimoney.com.
That said, the outcome may well be some pressure on prices.
“It may simply be a case of the numbers turning from being neutral for corn to showing a slight bearish tendency,” said Rich Nelson, chief feed grains analyst at Chicago-based Allendale.
“Stocks going back to the area around 1.9bn bushels may make traders think they are getting a bit burdensome again.”
‘Prices too high, whatever’
Not that Mr Nelson was any more reassuring on prospects for soybean futures, even though the Wasde is expected to lower the estimate for US carryout stocks for 2014-15 again, this time by 15m bushels to 370m bushels.
That would still represent a sharp jump in inventories from the 92m bushels at the end of last season, and prove insufficient to protect futures, which look overpriced.
“We are not at soybean prices reflecting 360m, 370m, 380m bushels,” Mr Nelson said.
“There is still room to the downside,” with the broker expecting an autumn low in futures of $8.00-8.40 a bushel – well below the $9.60 ½ a bushel at which Chicago’s November contract closed on Wednesday.
Argentine offset
The soybean inventory figure looks likely to be downgraded thanks to as March 1 stocks figure last week which was below market expectations.
However, “US soybean stocks need to slip below 300m bushels to create much excitement,” Mr Gidel said.
And even if they do, there is always the potential for an upgrade to the Argentine soybean harvest number to factor in.
RJ O’Brien’s Richard Feltes, while acknowledging the “risk of a lower-than-expected soybean stocks number” in the Wasde, said that “any US shortfall could be readily offset by gains in the Argentine soybean production estimate”.
And this is before getting to Brazilian numbers, which are also seen as likely to be revised.
Still, investors might prefer to rely for Brazilian numbers on data from the country’s own Conab crop bureau, due on Friday. And that is a whole other story.
