Know How To Hold Or Fold With Corn Weekly Corn Review for December 10, 2012 By Bryce Knorr Last week’s ugly turn in the corn market should have been a wakeup call for producers holding a lot of 2012 crop inventory unpriced. While that grain may ultimately worth a good deal more than it is today, the market faces what could be a very bumpy ride in 2013. Indeed, more signs of demand rationing last week are increasing the potential risk into USDA’s Jan. 11 report. With exports falling off a cliff there’s real danger that lower production estimates could be offset by lower demand that makes rallies more difficult, at least in the futures market. Net new bookings reported last week fell below 2 million bushels, and there’s doubt the number will get all that much better this winter. For one thing, just getting corn into position to export will be difficult due to disruptions on the river system. Add in potential for a dock strike off the PNW and it means exports could be 50 to 100 million bushels below USDA’s current estimate of 1.15 billion. My own supply and demand model, which tracks sales, shipments and exportable supplies, took a real nosedive this week. USDA may only cut 25 to 50 million off demand in its December report, but more reductions could be coming down the road. Even a crop that is 200 million bushels smaller than USDA estimates due to a reduction in harvested acreage, may not be enough to lower ending stocks forecasts much, if at all. Now, there’s potential for the market to rally in the spring and early summer, on either weather concerns or very tight supplies, or both. Lack of hard red winter wheat for feeding and the potential for drought to persist in the western Corn Belt may keep end users interested in having at least some purchases locked in. But without bullish news on Jan. 11, old crop prices could falter into the end of winter. Inventories should still be tight enough to produce rallies in the spring and summer, with potential for a rally, perhaps even to new highs. That’s the trend in recent bull markets, when stocks have been tight. But there’s also the possibility that the short crop, long tail pattern could also play out. That’s why I recommended staying long the basis over being long the futures, unless the futures side has some protection against a rally that never comes. This could be in the form of a short July call, or perhaps a long put. Those who didn’t get protection on when prices moved towards the top of their range likely need to wait for another rally, which could come into the January report. One reason I’m cautious was the big drop in open interest after expiration of December options. This isn’t unusual, but overall open interest has been falling since 2011. Without money from funds to gin up prices, futures rallies may be more difficult to achieve. New crop prices seasonally should have better strength over the winter, but producers should have priced bushels that won’t be protected by crop insurance. December 2013 tested the top of its trading channel last week but couldn’t sustain a breakout. Also start penciling out what you’ll need in 2014, assuming a 20% increase in variable costs. With futures around $6, small sales could be started now. Corn Supply & Demand USDA Area Planted Harvested Yield Beginning stocks Production Imports Supply, total Feed and residual Food, seed and ind. Domestic, total Exports Use, total Ending stocks Ave. cash price Stocks to use Ave. nearby fut. Harvest Ave. Futures 2011 2012 2011 91,921 83,981 96,946 87,721 147.2 1,128 12,358 28 13,514 4,547 6,437 10,984 1,543 12,527 988 $6.22 7.9% $6.52 Seasonal Peak Selling Range SOURCE: USDA, Bryce Knorr Bryce's Forecast 91,921 83,981 2012 Bigger Crop 96,405 87,721 2012 Currrent Estimate 96,739 86,305 2013 FF Estimate 93,056 85,402 122.3 147.2 122.4 122.0 162.6 988 10,725 100 11,814 4,150 5,867 10,017 1,150 11,167 647 $7.60 1,128 12,358 28 13,514 4,547 6,437 10,984 1,543 12,527 988 $6.00 988 10,728 100 11,815 4,140 5,827 9,967 1,137 11,105 711 $6.36 988 10,529 100 11,616 4,035 5,844 9,880 1,029 10,908 628 $6.59 523 13,874 10 14,406 4,718 6,365 11,083 2,092 13,175 1,241 $5.08 7.9% $6.74 6.4% $6.94 5.8% $6.61 5.8% $7.58 $7.28 to $8.16 $7.52 to $8.43 9.4% $5.22 $6.44 to $7.21 U.S. Corn Stocks/Use 70 60 50 30 20 10 Demand Rationing Ahead 14000 12000 10000 8000 6000 4000 2000 0 FEED - FOOD, INDUS EXPOR TS 12 09 06 03 00 97 94 91 88 85 82 79 76 73 70 0 million bushels stocks/use 40 Ethanol Margins Struggle $2.00 $1.50 per bushel $1.00 $0.50 $$(0.50) $(1.00) Mar 08 Mar 09 Mar 10 Mar 11 Farm Futures estimate Mar 12 Monthly U.S. ethanol production and stocks thousand barrels 35,000 30,000 25,000 20,000 15,000 10,000 5,000 2006 2007 2008 2009 2010 2011 2012 Source: USEIA Production Stocks Stocks 24000 23000 22000 21000 20000 19000 18000 17000 16000 15000 6/4/10 Production 1000 950 900 850 800 750 700 650 600 10/4/10 2/4/11 6/4/11 Ending stocks 10/4/11 2/4/12 6/4/12 Daily Production 10/4/12 thousand barrels thousand barrels Weekly Ethanol Production and Stocks Weekly Export Inspections in million bushels WHEAT CORN SOYBEANS This Week 14.2 9.6 51.1 For week of 11/29/12 Rate Needed Average This to Meet Year-to- Year-toTrade Week Last USDA Date Total Date Total Last Week Guess Year Forecast This Year Last Year 8.1 8-12 14.6 25.1 461.0 533.6 16.1 15-19 38.9 24.4 208.3 401.0 46.6 52-57 32.1 20.4 600.3 429.1 Source: USDA, Reuters Weekly Export Sales (million bushels) AS OF WEEK ENDING 11/29/12 Actual Wheat Corn Soybeans 13.0 1.9 42.0 Last Week Trade Est. USDA F'cast Export Shipments 10.3 10.4 11.7 15.6 17.7 22.1 18.9 14.8 13.5 14.3 11.5 57.1 USDA F'cast 25.2 27.4 23.6 % of USDA Com mit. 55% 42% 78% Ave. 66% 44% 56% Source: USDA, Reuters Total Corn Sales & Shipments (Year to Date) 1600 70% 1400 60% 1200 50% 1000 40% 800 30% 600 400 20% 200 10% 0% 0 Total Commitments % of USDA Forecast % of USDA Shipments 40% 23% 28% Ave. 49% 23% 30% Corn Shipments (Year to Date) 700 35.0% 600 30.0% 500 25.0% 400 20.0% 300 15.0% 200 10.0% 100 5.0% 0 0.0% Total Shipments % of USDA Forecast Total Next Year's Corn Sales (Year to Date) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 SOURCE: USDA. July Corn Bull vs Bear Years 430 840 410 820 390 800 760 350 2012 780 370 740 330 720 310 700 290 680 270 660 640 250 7/13 9/13 11/13 Bull Market Years 1/13 3/13 Normal Year 5/13 7/13 Year-after bull July 2013 SOURCE: CBOT. December Corn Bull vs Bear Years 480 700 430 600 Average 400 330 300 280 200 230 100 0 180 6/1 8/1 10/1 Bull Market 12/1 2/1 Normal Year 4/1 6/1 8/1 Year-after bull 10/1 12/1 Dec-13 Dec-12 500 380 600000 $9.00 500000 $8.00 $7.00 400000 $6.00 300000 $5.00 200000 $4.00 $3.00 100000 $2.00 0 -100000 1/06 $1.00 $0.00 1/07 1/08 1/09 1/10 1/11 1/12 Source: CFTC Index funds Hedge funds Net open interest in corn (futures and options) 3,000,000 net contracts 2,500,000 2,000,000 1,500,000 1,000,000 500,000 - Source: CFTC SOURCE: CFTC, CBOT Futures nearby futures net position in contracts Commitment of Traders - Corn