Another View

The USDA Grain Stocks report Wednesday showed Sept. 1 corn stocks of 1.731 billion bushels, up from 1.236 billion bushels last year and 821 million bushels in September 2013. The stocks figure was below the average trade estimate for the third time in the past nine years but still showed a big year-over-year build. Those stocks builds are inversely related to the cash average price and also tend to discourage speculative participation on the buy side of the market.

The September report continues to be the most difficult quarterly report to forecast. The uncertainties about feed and residual use and consumption of some new-crop supplies in the old-crop slot are the largest contributors to this uncertainty. This report was actually a very small "miss" for the trade by recent standards, and the market reaction was equally muted, with December corn settling 1 1/4 cents lower for the day.

One change that has improved trade accuracy is the resumption of the NASS Current Agricultural Industrial Reports, particularly the monthly Grain Crushings report (http://bit.ly/…). That report has corrected ethanol yield assumptions and improved the accuracy of the USDA food, seed and industrial usage estimates. Better numbers make the residual use figure more accurate and potentially lead to fewer disconnects between the WASDE ending stocks estimate and the actual Sept. 1 stocks.

There are some things we want to look at within the corn data that might color our perception of what comes next for corn basis and prices. The most immediate question is: Is there an overhang of old-crop corn that producers are going to have to give away at fire-sale prices in order to clear out bins?

The Sept. 1, on-farm stocks were estimated at 593 million bushels, up 131 million from last year. This is a 28.3% increase in leftovers, but only 4.4% of the September estimate of 2015 production. A 1.6-bushel-per-acre drop in 2015 yield expectations would erase the increase in on-farm stocks from last year. A cut of 782,000 harvested acres in the October crop report would also erase the differential. The yield cut is a higher probability for the Oct. 9 report than an FSA-inspired acreage cut of that magnitude.

There are some interesting things going on within the different growing areas. Take the Eastern Corn Belt for example, which we define as Ohio, Indiana and Illinois. The first table shows Sept. 1 corn stocks, estimated production from the September Crop Production report and the total supply available in that region.

ECB Corn	2010/11	2011/12	2012/13	2013/14	2014/15	'2015/16
(million bushels)
Stocks	377	253	265	192	244	479
Production	3,378	3,273	2,332	3,798	4,045	3,403
Total Supply	3,755	3,526	2,598	3,990	4,290	3,882

Sept. 1 stocks were up a huge 235 million bushels from last year and are the largest for those three states since 2005-06. The problem is almost exclusively in Illinois, where the Sept. 1 old-crop corn pile was 71% larger than last year at the same time. Ohio was up 13% and Indiana was up 40%. Illinois clearly had trouble digesting the record 2014 crop and getting it sold. Producers in all three states are looking at smaller 2015 production and likely held back some old-crop corn against new-crop contracts.

Regional disappearance in 2014-15 was 3.811 billion bushels, up only 66 million bushels from the previous year. That is not sufficient with a 247-million-bushel jump in production. With lower 2015-16 prices and expanded hog and poultry production nationally, further growth in domestic use would be expected. Exports -- also included in disappearance -- are not expected to increase from a year ago due to increased global stocks.

What about the Western Corn Belt (WCB)? The Sept. 1 stocks growth was almost the same as the ECB, up 234 million bushels for the five states of Iowa, Minnesota, Missouri, Nebraska and Kansas. The five-state production is also expected to be up close to 134 million bushels in 2015. That is different from the ECB, where a loss of 642 million bushels is currently projected.

To clarify the point, the ECB is lugging 235 million bushels of extra carryover, but could be down 642 million on production based on the September numbers. That would imply a sharp drop in ECB 2016 stocks unless there are big consumption changes. The WCB is lugging 234 million bushels of additional old-crop corn, but is also expected to increase production by another 134 million bushels.

WCB Corn	2010/11	2011/12	2012/13	2013/14	2014/15	'2015/16
(million bushels)
Stocks	942	605	498	428	636	870
Production	5,864.7	5,892.08	5,166.3	5,987.61	6,342.13	6,476
Total Supply	6,807	6,497	5,664	6,416	6,978	7,345

The use story for the WCB states showed little year-to-year improvement, at 1.231 billion bushels for the fourth quarter versus 1.208 billion in the fourth quarter of 2014. The easing of the PEDv crisis allowed a sharp buildup in hog numbers and thus more corn use. However, the WCB states were hit hard by the highly pathogenic avian influenza outbreak and lost a lot of use by layer and turkey operations. Final U.S. exports for the fourth quarter should be within 20 million bushels of a year ago. The main story there is the inability to grow them in the face of the additional supply.

So what does this all mean? Corn supplies were comfortable to start the marketing year, and there were 368 million more bushels in off-farm locations compared to a year ago. Traders have little necessity to bid aggressively for corn nationally, with basis suffering.

The regional pictures are a little different. If ECB production remains more than 600 million bushels below a year ago, corn stocks there will have to be drawn down sharply. Elevators have been working aggressively to convince producers in the ECB to sell corn now, at a better-than-usual harvest basis, knowing full well that it will get much stronger later. The WCB had more storage filled going into harvest than it did a year ago, and prospects of a bigger crop unless NASS reduces harvested acres or yield in the October reports.

Elevators in the WCB are expecting to have some ground piles, even with the big increase in on-farm storage. Basis will likely be slower to respond, but eventually firm up because the deficit situation in the ECB will draw rail cars that direction. Loss of consumption due to slow exports or renewed PED/HPAI outbreaks will be broad threats that could slow a stocks drawdown. At present, we do expect corn stocks on Sept. 1, 2016, to be several hundred million bushels below the number shown for Sept. 1, 2015.

Alan Brugler may be contacted at alanb@bruglermktg.com

(AG/KM)

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