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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 6, 1997) CORN: The September 1 Stocks In All Positions report released last week had a few surprises for corn traders. The market was expecting the September 1 stocks to be 933 million bushels, but the USDA pegged corn stocks at 884 million bushels, 49 million beneath the average trade guess and 4 million below the low end of the pre-report range. Although the stocks report initially caught the market off guard, traders soon realized that there are too many fundamentally bearish factors influencing corn for one report to make much difference.
Over the last two weeks, market participants have probably added at least 100 million bushels to their 1997/98 corn production estimates, largely mitigating the smaller stocks figure. Indeed, the market closed a penny lower last Tuesday, the day of the “friendly” stocks report. This should not have been too surprising considering all of the negative fundamental factors surrounding the corn pit, such as fantastic harvest weather, an improved crop conditions rating, and great yield reports from early cuttings in the Central Corn Belt.
The smaller-than-anticipated stocks figure results in a 5% lower carryin than the market was expecting, and the 49-million-bushel reduction is just one-half of 1% of total 1997/98 supplies. To put this in perspective, the reduction equates to about two-thirds of a bushel of yield based on our forecast of harvested acreage in 1997 of 74.049 million acres.
The stocks report also implied that fourth-quarter feed/residual demand was 846 million, bringing the 1996/97 total to 5,362 million versus 5,300 billion estimated in the September Supply/Demand report. It is natural to assume that the easy way to figure potential 1997/98 feed demand would be to multiply the feeding ratios apparently used in the fourth quarter of the last season against livestock numbers. Of course it is not that simple. As we discussed in our previous weekly report, feed demand inherently includes any errors made on the estimates of both demand and supply. Generally, big residual errors are generated in big production years. With 1997 production on track to become the second largest on record, we can expect to see large residual errors as well. Simply looking at animal numbers does not tell the whole story either because there is a definite upward trend in the amount grain fed to animals.
The Grain Consuming Animal Unit (GCAU) measure (an index that tries to capture the amount of grain fed to each individual livestock unit) provides more insights than just looking at animal numbers, but also has built-in inaccuracies. These inaccuracies versus actual corn fed result from the errors not being excluded from actual feeding. This pattern is evident in several recent years, starting with the two highest feed/residual years on record–1994/95 and 1996/97, when feed/residual demand was 5,537 million and 5,362 million bushels, respectively. When the USDA estimated GCAUs for all livestock at 84.3 million units in 1994/95, corn consumed for feed totaled 140.3 million tonnes. In 1996/97, the USDA estimated GCAUs for all livestock at a similar level of 85.7 million units, but corn consumed for feed was lower at 135.71 million tonnes. Thus, even the GCAU analysis shows that feed demand can vary by 6-7 million tonnes (225-275 million bushels) in just the span of a couple of years, amounts that presumably are the residual from all estimates, including supply. The swing was even more dramatic in 1995/96 versus the previous year, when GCAUs were estimated at 85.2 million units and corn consumed for feed was only 119.2 million tonnes. down 22-23 million from 1994/95. In 1995/96, hot temperatures during the growing season and an early freeze likely produced production estimate errors that accounted for part of the decline. Thus, the GCAUs and the feed number are a broad-brush attempt to estimate total feed demand. For 1997/98, the USDA projecting a record GCAU number at 87.8 million units, as well as a record figure for corn feed consumption at 140.5 million tonnes.
At this early juncture in the 1997/98 season, before supply is defined (80% of the crop has yet to be harvested) our models peg feed/residual demand at about 5,605 million bushels versus the USDA's current estimate of 5,550 billion bushels. Part of this difference is because our production estimate is larger than current USDA figures. The early harvest tone suggests that yields are larger than the USDA's latest estimate of 125.2 bushels per acre. Barring any adverse weather for the balance of harvest, we believe yields will exceed our previous estimate of 127 bushels per acre, and have raised our forecast to 128 bushels per acre, resulting in a 74-million-bushel increase in our production figure to 9,478 million.
Larger supply affects other demand components as well, and as U.S. corn production estimates rise, both food/seed/industrial (FSI) demand and exports typically increase. We are projecting FSI at 1,749 million bushels and exports at 1,952 million; both figures are below USDA's current projections, but above those for 1996/97. The net result is that we expect 1997/98 carryout to grow to 1,067 million bushels from the USDA's projected 1996/97 carryout of 884 million. In turn, the stocks/use ratio would increase to 11.5% from 10%.
HARVEST PRICE OUTLOOK–We expect corn prices to weaken as harvest activity picks up. The corn crop harvest was 9% complete last week and probably will breach 20% on Monday's report. We project that harvest will be 50% complete between October 15 and 20, and that December corn should have made its harvest low of $2.40-$2.50 per bushel. To reach those lows, December corn must first penetrate strong support in the $2.55 area.
Tom Levis
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