By Gavin Maguire
CHICAGO, Jan 14 (Reuters) – After more than a year of enduring a generally downbeat market in which prices fell roughly 40 percent in 2013 alone, corn bulls were finally given something to smile about in the latest U.S. Department of Agriculture crop report depicting stronger demand and lower overall supplies than most analysts expected.
While the latest upbeat demand statistics may trigger a wave of speculator short covering in the corn market, market bulls must not overlook the fact that commercial grain buyers are currently sitting on their largest-ever pile of corn for this time of year, which should put them in a position to avoid having to chase prices higher any time soon.
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FOCAL SHIFT
The January USDA crop report is typically one of the most significant of the year for corn because the finalization of the prior year’s crop production assessments forces market focus to shift from supply to demand. From mid-summer onward, almost all market attention is on estimating the scope and health of the U.S. crops during the growing season. But once the January report issues the final decree on the size of those crops, traders are forced to turn more of their attention to the demand side of the equation until the following growing season comes around.
The latest January release triggered quite an abrupt change in corn market mindset and tone as the USDA’s findings featured lower-than-expected production totals, as well as brisker-than- anticipated consumption levels. Indeed, in percentage terms, corn’s price advance in the wake of the USDA report was the largest since 2007, and so clearly caught many market participants off guard.
Yet as the dust settles and traders digest the impact of the headline changes of the report, it is becoming clear that while the updated demand statistics may prevent prices from falling much lower, the updated inventory numbers may be reason enough to limit further upside progress over the near term.
TAKING STOCK
In addition to finalizing its crop production estimates, the USDA also released updates on crop inventories held by farmers and commercial entities as of December 1.
The most closely tracked statistic therein was the on-farm inventories total, as anecdotal evidence suggested farmers were intent on storing away a decent chunk of last summer’s production in the hope that higher prices would materialize in the months ahead.
Sure enough, the on-farm total was close to 40 percent, or 1.8 billion bushels, larger than the same period a year ago at 6.38 billion bushels, and confirmed that a large amount of grain was indeed locked away in farmer storage bins.
But upon closer inspection, the inventory number of greater significance was the amount of grain held by commercial entities in off-farm facilities, which actually hit their highest level on record at just over 4 billion bushels as of Dec. 1. That total marks a 50 percent increase over 2003 levels and signals a clear push by corn end users to establish and maintain ample grain reserves on-hand. (In contrast, on-farm corn storage is up only 21 percent from a decade ago).
The commercial holdings swelled throughout country, with off-farm corn stocks hitting a record in the Dakotas, Ohio, Indiana and Nebraska, while also showing gains in Illinois and elsewhere.
CAPPING THE BASIS?
The commercial build-up in corn stocks occurred during the recent period of pronounced corn price weakness, and therefore reflects some astute and economically savvy trading by the end user community.
The stocks accumulation also helps explain why basis levels paid by commercial buyers were stronger than usual during the last few months of 2013, even amid patchy domestic demand readings.
But the ample commercial inventories total is also a reason to expect only limited gains in basis strength going forward, especially if flat prices remain steady or continue to push higher.
Now that commercial end-users have amassed more than 4 billion bushels of on-hand reserves, many of those stock holders can afford to back away from the corn market whenever price levels or market sentiment accelerate sharply to the upside.
This tapering in commercial buying interest could in turn undermine further rally attempts, and potentially cap corn prices in the run up to the 2014 U.S. planting season even if prices are now broadly expected to avert further losses.
Large-scale speculator short covering may well continue to generate sporadic strength in futures prices in the weeks ahead, especially if those traders anticipate general corn demand to gather further momentum in 2014 and so seek to reduce their near-record net short stance in the market.
But with commercial traders potentially able to sit out any sharp price rallies over the near term thanks to their largest-ever tonnage of corn reserves, any additional gains in futures prices may not necessarily be accompanied by strength in the cash market, which remains the chief barometer of overall corn market well being.
So while the latest USDA release may well have put an end to the corn price bear phase that has gripped this market for more than a year, the relatively high level of commercial inventories means we may not yet have transitioned into a full-fledged bull market.
