We’ve all lost our car keys and then found them a little later.
It’s not hard to misplace a small item, but when about seven million tonnes of corn go missing for a few months and then show up again, it’s hard to argue that they were in the pocket of a coat you haven’t worn in a while.
Late last week grain markets staggered on the news that the United States Department of Agriculture’s Sept. 1 corn stocks report was about 7.6 million tonnes higher than what traders had anticipated.
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The news assuaged worries about disappointing yields in the early harvest. Although the new crop might be a little smaller than expected, the combination of new crop and old stocks would provide a more comfortable level of total available supply.
Corn futures fell 6.6 percent in the two days following the USDA report and its weakness spilled over into other crops, including wheat and canola.
The strange thing was that the previous corn stocks report released June 30 was also a shock, but for the opposite reason. That estimate was 7.3 million tonnes less than expected. It was the spark that started off the summer corn price rally.
Some are wondering how more than seven million tonnes “disappeared” in the June 1 report and “reappeared” in the Sept. 1 report.
It’s likely not the case that USDA forgot to count that seven million tonnes of corn stored out behind the Quonset just next to the rusting 1978 Buick Electra. Changing market dynamics are the main explanation for stocks changes.
The explanation given for the low June 1 number was record ethanol production and strong export demand in the spring. Also, feed use was up because of quality problems. It was taking more bushels of corn to get the same feed value.
And another train of thought was that the USDA overestimated the size of the 2009 crop.
The explanation for the high Sept. 1 number, was that ethanol and cattle feeding demand fell over the summer,
although some don’t buy that, noting that cattle on feed on Aug. 1 were two percent larger than in 2009. Some also thought that early harvested 2010 crop had improperly been included in the stocks figure, but USDA said it takes pains to ensure that won’t happen.
Surprise stocks reports are not limited to the U.S.
Statistics Canada had to revise upward its 2009 canola crop figure after a stocks report came in higher than expected. The only explanation was that StatsCan underestimated the size of the 2009 crop. In its production report released Oct. 4, it revised the 2009 crop to 12.4 million tonnes, from 11.8 million.
USDA and StatsCan generally do a good job and these adjustments represent only a small fraction of total supply, but in a year when supply to demand ratios are tight and there is a lot of activity and volatility in the market, even small revisions can have a significant price reaction and change market perceptions.
The USDA will give another snapshot of the potential size of the 2010 crop on Oct. 8. If the forecast of the new corn crop comes in below expectations, we might all forget this concern over stocks, but if it does not drop its forecast, then the bullish enthusiasm that marked the grains markets this summer could drain away.
