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(August 11, 1997) CORN: In reaction to changing weather forecasts for the weekend of August 9-10, the corn market gave back 12 cents per bushel of the previous week's 27-cent gain. Last week's early Monday rally quickly faded as the trade honed in on the wet weather forecasts bandied about by some private services. The dry soil conditions in the heart of the Corn Belt and the extensive drought currently ravaging the North China Plain and Manchuria no longer mattered to the market, despite the serious production implications. Thus, prices ground slowly lower throughout the week.
As the corn crop approaches its final days of pollination, U.S. weather across the Corn Belt remains the single most influential fundamental factor. Last week's crop condition report showed the crop was 85% pollinated versus 60% the previous week and 75% on average. This week's report will most likely show 95%-99% completion. Next comes the important filling stage, in which the pollinated kernels plump up to their mature size. The corn plant needs ample moisture–as much as 0.2 inches per day–to accomplish appropriate filling.
However, the market's focus early in the week will be the USDA's Supply and Demand report to be released Tuesday morning, August 12. This report will include the first production estimate based upon an objective yield survey. The previous yield estimate, released in June and repeated in July, was a subjectively derived projection that can differ significantly from the August yield estimate. This year should prove no different. The current USDA estimate of 131 bushels per acre will most likely be sharply lowered in Tuesday's report. Current market expectations for yield range from 124.5-135 bushels per acre, with an average of 129.24 bushels. This average expected yield would drop production 130 million bushels from the July estimate to 9,570 million–still the second largest crop ever, but a far cry from the 10.1-10.4 billion bushel potential that existed earlier in the year. The trade range for corn production is between 9.2 billion and 10.1 billion bushels compared to USDA's July estimate of 9.7 billion.
We believe the USDA's yield estimate will come in a little lower than the market is anticipating. We look for USDA to forecast 128-129 bushels per acre, with production between 9,475 and 9,550 million bushels. At this point, 3 10-billion-bushel crop is unlikely; that would require a yield of 135 bushels per acre, which would require timely showers now through the filling stage. This type of weather is not currently in the forecast. Although it remains possible that yields could reach into the 1303, weather would have to cooperate.
OLD- CROP SUPPLY AND DEMAND–We are projecting a 75-million-bushel decrease in 1996/97 export demand due to lagging export inspections. In order to meet the USDA's projection of 1,825 million bushels, the United States would have to export an average of 46 million bushels for the last 4½ weeks of the marketing year versus the four-week average of 24.7 million bushels. We believe that the USDA will recognize the growing discrepancy between its projection and reality, and lower its export figure to 1,750 million bushels. This 75-million-bushel decline would cause ending stocks to rise by a similar amount, to 991 million, and lift the stocks-to-use ratio to our projection of 11.3% from 10.4% as currently projected by the USDA.
NEW-CROP SUPPLY AND DEMAND–New-crop supplies could climb to 10,551 million bushels among the following: (1) increased old-crop carryout of 991 million bushels; (2) a token 10 million bushels in new-crop imports; (3) a new-crop yield of 129 bushels per acre; and (4) new-crop production of 9,550 million bushels. Total supplies have been larger only twice in the last 10 years–1992/93 and 1994/95–both record production years. What's more, our total supply estimate could rise further given proper weather conditions. We are estimating feed/residual demand at 5,524 million bushels, 76 million (or 1.3%) below the USDA's current estimate. However, the USDA's forecast probably will decline if its production figure falls. Feed/residual is the
single largest demand component, and unlike exports (of soybean crush), is not easily measured from week to week.
Food/seed/industrial demand is projected to be down 26 million bushels to 1,754 million, also reflecting the potential supply decline from the July report. At this point, we do not see much volatility to this demand component.
We expect export demand to be up significantly from the USDA's July report. The USDA is currently using a figure of 2,050 million versus our projection of 2,193 million (a 7% increase). We believe the world balance sheet justify this high level of exports. We are expecting to see the USDA sharply curtail Chinese 1997/98 corn production from its July estimate of 122 million tonnes, which in turn affects coarse grain production and exports. Due to the ongoing drought in the North China Plain and Manchuria, which produce 90% of Chinese corn, the trade has been revising corn production downward. The low end of the range is 100-105 million tonnes, reflecting a 15%-18% drop. We are a bit more optimistic, projecting a Chinese corn crop around 110 million tonnes. Still, any estimate should be taken with a grain of salt because very few in the trade have ever been to China and all forecasts are derived from anecdotal weather evidence.
Nonetheless, a 10- to 12-million-tonne shortfall in Chinese corn production should virtually eliminate that country's corn export program, and could cause it to import coarse grains, largely corn. Don't be surprised to see China swing from exporting 2-3 million tonnes to importing 2-4 million over the 12 months following harvest. Because China has been exporting to traditional U.S. customers along the Pacific Rim over the last few years, our 1997/98 U.S. export projection is beefed up to reflect improved prospects for U.S. exports as a result of the Chinese difficulties.
We expect U.S. export demand in 1997/98 to reach a new record of 9,470 million bushels, a level nearly equaling our forecast for production. As a result, we anticipate ending stocks will grow only marginally, to 1,081 million bushels; the stocks-to- use ratio should increase slightly versus 1996/97 to 11.40.
The market will be most keenly focused on the production figure in Tuesday's report, followed by the forecasts for ending stocks. A production figure much below the 9.5-billion-bushel mark will be construed as supportive. Our bias is that the USDA will come in about as expected on the production side, but will increase new- crop exports significantly, a figure that will be partially offset by the increased carryin. All told, the report has fair-to-good probabilities of being construed as supportive by the trade on Tuesday morning.
Tom Levis
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