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LINNCO FUTURES GROUP
233 S. Wacker Dr., Ste. 2400, Chicago, Illinois
(October 24, 1997) CORN: The USDA reported the third largest crop in history at 9.3 12 billion bushels, 44 million above the September report. The report was considered bullish as it was below the average trade guess of 9.39 billion bushels and a reduction in world ending stocks are projected below the record high corn price year of 1995 by 2.5 mmt. The market had already rallied nearly 25 cents going into the report and scored the highest prices since the middle of April. The price action has featured the funds as a large buyer on already known fundamentals. The question now is how high will the price go?
USDA Supply/Demand For Corn
(Released October 10th)
1997/1998
(Mil. Acres) September October Planted 80.2 80.2 Harvested 74.0 74.0 Yield 125.2 125.8 (Mln. Bushels) Beginning Stocks 941 884 Production 9268 9312 Imports 10 10 Total Supply 10219 10206 Feed And Residual 5550 5625 FSI 1780 1775 Domestic Use 7330 7400 Exports 2025 2025 Total Use 9355 9425 Ending Stocks 864 781 Stocks/Use 9.2% 8.3%
PRODUCTION–The National Agricultural Statistical Service has done a good job considering the variability of this year's corn crop. They found increases in production in IL (up 2 bpa), KS (up 5 bpa), and MI (up 3 bpa), which was offset by decreases in WI (dn 2 bpa), IN (dn 2 bpa), and NE (dn 1 bpa). The other key states were left unchanged. There is still a question to final crop size as there has been a lot of talk of ear droppage due to corn bore and larger reported yields in Midwest and Texas. The breakdown between the eastern and western Corn Belt showed a swing of 70 million towards the eastern belt and is it estimated that the eastern belt will have 230 million bushels more and the west 150 million less. The only other area to see major changes in production is the southeast, where production is estimated to be reduced by 83 million. The USDA did increase sorghum production by 9 million bushels to a crop size of 665 million bushels. The total feedgrain production was increased by 1.1 mmt from September, but is 3.1 mmt less than last year due to a smaller sorghum crop.
DEMAND–The USDA projected corn demand to a record of 9.425 billion bushels, surpassing the old record of 9.404 billion set in 1994. The only change the USDA had from last month's report was in the feed/residual sector, which increased 75 million to a record 5.625 billion. The reason for the major increase in feeding rates came from the September Stocks report and All Pig and Hog report The latest Stocks report (September 30th) showed a larger than expected reduction in supplies (ending stocks reduced 57 million bushels), and was suggested that we had the second largest feeding ever in the fourth quarter (the USDA decided not to reduce the crop). The most recent Livestock report indicates cattle on feed (the largest consumer of corn) to be 13% greater than last year, while hogs (the second largest consumer of corn) are projected to be increased by 7% from last year (farrowings). The projected increases seem to be logical, but the question of profitability (meat exports continue to drop) and the availability of feeder cattle could threaten this trend. Large wheat stocks in the southwest could also become a factor, eventually tempering corn demand. The export sector remains a wild card, as traders are questioning if the Chinese will return as an importer (see China).
World Corn Supply/Demand
(in mullion metric tons)
1997/98 1997/98 1995/96 1996/97 Sept. Oct. Beg. Stocks 136.23 66.20 86.28 84.18 Production 799.58 589.82 573.68 570.40 Imports 100.35 69.24 70.30 71.45 Feed 548.46 397.55 413.55 416.21 Domestic 291.64 174.28 175.57 174.67 Exports 107.60 71.83 71.91 73.06 End Stocks 95.70 84.18 70.85 63.75
WORLD–The USDA is projecting a lower world ending stocks of corn than in the record high corn prices set in 1995. The projected ending stocks at 63.7 mmt are down from last month's projection by 7.15 mmt, the ending stocks are lower than 1995 by 2.5 mmt (66.2 mmt). The reduction in supply comes from the Chinese crop declining 5 mmt, while demand shows an increase in feeding by 2.3 mmt. The coarse grain ending stocks have also been reduced by 5.95 mmt to 99.69 mmt from last month, but are a large 10 mmt above the projected 1995. The world supplies are no doubt tight, but there are indications that we could see increases in production in Argentina (attache is 1 mmt larger than USDA) and possibility in Australia. The feeding rates can also be questioned with the large increase in world wheat ending stocks of 5 mmt and it is indicated that the world has a large excess of feed wheat.
CHINA–There has been much discussion to the crop size and will China need to be an importer this year. The 105 mmt production estimate didn't come as a surprise as the U.S. attache had pegged this corn production estimate back in late September. The question of imports is of mixed opinions, as the Chinese government has suspended new corn sales and the same attache has predicted that China would import 1 mmt. The suspension of exports comes from the cheap export offering compared to the high domestic prices and the upcoming harvest. It should also be noted that the Chinese have been offering corn for sale for the J/F/M time slot as late as October 8th. The reason for corn exports still lies with the record wheat harvest and China's desire to feed wheat. It is impossible for China to export wheat for political reasons, the only way to use excess supplies is in the feeding sector. It should also be noted that recent articles written in the Wall Street Journal have placed Chinese unemployment at the highest levels in three years and there are major concerns regarding economic stability of rural manufacturing, which is 40% of their GNP. I still see China as a small exporter and would only turn to the U.S. market if there were a problem with the new-crop wheat (being planted now).
PRICE PROJECTIONS–In recent Growing Trends I have been talking about the market having little downside potential and a rally could take prices up to the $3.25 level. This recent rally has taken prices for March forward above the $3.00 levels and appears to be on a mission to reach my price projections in a hurry. There are some concerns to projecting prices to reach these levels while harvest is still in progress. The crop size is still in question, will the record feeding demand materialize, and will the soft Asian economies effect our corn exports. The recent rally has also seen large fund buying and there has been estimates that fund ownership is nearing 400 million with the recent 30-cent rally (232 million as of September 30th). It should also be remembered that the producer is still the largest long, and has sold a historic small percent of his crop. In 1995 we didn't see the majority price rise until a high percentage of the production was sold and even placing the producer short with the “HTA.” There are plenty of sellers once the prices have topped or hit magic levels. I feel we should anticipate a price correction or a sideways to lower trade. I don't expect a complete washout, but we could see a seasonal high in the fourth quarter and price movement could become stagnant after that. If this should occur, then selling out of the money calls are the way to line up. The numbers are bullish, but there are enough questions regarding demand, traders can wait to be long and use a defensive approach to the market. Users should be looking at buying the price decline and offsetting the position with writing (selling) out of the money calls. The bull spreads offer less risk and still offer great profit potential if this anticipated bull market occurs. The best spread will be the March/July, do it in quantity.
Doug Price
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