wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(November 10, 1997) CORN: The USDA will release the November Supply and Demand report on Monday morning November 10. This report is fairly important because it is the last one that includes a survey-based production estimate until the final report in January. The market has been anxiously awaiting the new forecast because if there are major changes in the production level, then projected demand estimates will change as well. The USDA estimated 1997/98 corn production in October at 9,312 million bushels, using a yield of 125.8 bushels per acre. The average trade estimate for the upcoming corn production figure is 9,348 million bushels (equal to an average yield of 126.2 bushels) with a range of 9,233 million to 9,495 million bushels. We are projecting a final yield of 127.0 bushels per acre, which results in a production figure of 9,404 million bushels.
The market appears comfortable with a corn production figure that is just 36 million bushels higher than the October forecast, or an increase of about 0.5 bushels per acre. Historically, there is a strong tendency for the November report to show higher yields than the October report if the October yield estimate increased from the September estimate, which it did this year. Since 1971, the USDA has raised its October estimate above the September forecast 16 times; in 15 of those years, the November yield estimate also rose. (In 1987, the November yield estimate was unchanged from October.) The last five times when yield estimates grew from September to October, the November estimate increased a average of 4.5 bushels per acre above the October estimate. We certainly are not suggesting this average will be the case this year, but we project that the USDA likely will increase yields to at least the average trade guess of 126.2 from 125.8 bushels per acre, and possibly as high as our estimate of 127 bushels. This would cause production to rise from 35 million to 92 million bushels and would likely cause the USDA to adjust demand components as well.
We eventually expect to see 1997/98 corn production climb to 9.4 billion bushels. Accordingly, our feed/residual demand estimate of 5.582 million bushels reflects the larger crop size. We are still mystified with the USDA's current projection of 5,625 million bushels for feed demand. It is difficult to generate estimates that high based upon animal numbers and a crop of 9.312 million bushels, thus, there must be a considerable amount of residual in this demand component. Even if the USDA increases its production estimate to 9.4 billion bushels on this report, we do not anticipate a further increase in feed demand; if anything, this number is too large.
It is hard to quibble with the food/seed/industrial (FSI) demand forecast from the USDA. That component is normally stable, and eventually the USDA estimates are adopted (at least in an effort to back into the feed/residual number once exports are known). The increase in FSI demand versus last year probably reflects the normal 2.5%-3.0% growth, plus a little catch up due to one major ethanol producer returning to full production capacity.
Export demand is the big question mark for corn. Currently, the USDA is projecting export demand at 2.025 million bushels. Meanwhile, China continues to sell corn to traditional U.S. customers such as Malaysia, South Korea and the Philippines, eroding U.S. export opportunities. So far, the United States has exported about 244 million bushels and committed another 287.3 million for a total of 532 million bushels. This number lags last year's pace when 790 million bushels were already committed out of a much smaller total projection of 1,800 million. In order to meet the USDA's projection of 2,025 million bushels, the United States must sell an average of 34.5 million bushels per week for the balance of the crop year. The four-week average is only 23.8 million bushels. We believe that exports eventually could rise to 1.94 billion bushels, but that is counting on additional export opportunities from Chinese imports (an item of debate) and potential weather-related problems in South Africa. If the weather improves in South Africa and China does not import corn, then 1.9 billion in U.S. exports could very well be on the high side.
WORLD CORN–It is anyone's guess whether the USDA will adjust 1997/98 Chinese corn production figure from the October estimate of 105 million tonnes, but there could be other changes in China's balance sheet. Given the drought that ravaged the 1997/98 crop and the aggressive export program to date, it is possible that the USDA will increase imports closer to 1.0 million tonnes from a meager 250,000 tonnes currently. Additionally, expect to see 1997/98 exports raised to at least 3.0 million tonnes from 2.5 million tonnes, reflecting recent sales and the potential for more through March 1998. The net result is that the Chinese corn ending stocks projection probably will remain unchanged at 21.5 million tonnes.
As for South Africa, it may still be premature to start slicing production due to hot, dry conditions associated with the persistent El Nino. South African corn is normally planted from November through late December, and producers are just getting plantings underway, having been delayed by very dry weather. In October, the USDA estimated 1998/99 South African corn production at 8.5 million tonnes versus 9.0 million last year. Although the El Nino does not have as strong a correlation with problems in South African corn production as with Australian wheat, the effect is fairly strong. The last two major El Ninos (1991 and 1994) cut South African corn production by 5.0 million and 8.5 million tonnes, respectively, the previous major El Nino in 1987 had no impact on production. Thus, even if the correlation is not perfect, El Nino can have a dramatic impact on South African corn production. This year, it is a waiting game to see what develops with weather. Until then, any production cuts on the USDA's behalf should be minimal at most.
Tom Levis
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com