Know How To Hold Or Fold With Corn

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