wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 13, 1997) CORN: The corn market had a wild and woolly week, gaining 23.5 cents per bushel on a closing basis from October 3-10. The final kick came from the USDA's Crop report on Friday, which pegged 1997/98 corn production at 9,312 million bushels. This figure was a little smaller than the average trade estimate of 9,400 million, and coupled with increased U.S. demand, was considered very bullish. Further support came from a 5- million-tonne reduction in the 1997/98 Chinese corn crop estimate, to 105 million tonnes.
The USDA raised its corn yield estimate to 125.8 bushels per acre from 125.2 bushels last month, which accounted for the 44-million-bushel production Increase. We project a final yield of 128 bushels per acre and production of 9,478 million. –The largest increases in corn production were in Missouri and Illinois, where output estimates each climbed 23 million bushels. Surprisingly, Iowa's estimate was unchanged at 1,673 million bushels despite early harvest reports that indicated the September crop estimate was too small. If some cash sources are right in their predictions that the Iowa corn yield could be 2-3 bushels per acre above the USDA's current yield estimate in that state of 140 bushels per acre, it would equal another 30 million bushels of production.
The market correctly anticipated the 1997/98 beginning stocks of 884 million bushels, a figure picked up from the September 30 Stocks report. The USDA increased feed/residual demand by 75 million bushels, raising it to a new record of 5,625 million bushels. It was surprising to see the USDA's feed estimate so close to our own when our production estimate is 166 million bushels larger than the USDA's. Food/seed/industrial use was reduced marginally to 1,775 million bushels while exports were unchanged. Projected carryout dropped 83 million bushels to 781 million, causing the stocks/ use ratio to drop to 8.3% from 9.2%. Our projected carryout is 1,067 million with a stocks-to-use ratio of 11.5%.
On the world corn balance sheet, production was cut by 3.3 million tonnes to 570.4 million while demand increased 1.8 million tonnes to 590.9 million. These changes caused ending stocks to decline by a whopping 7.2 million tonnes and stocks-to-use ratio to fall to 10.8% from 12.0%. However, bear in mind that most of this decline was from China, and the market was expecting to see Chinese production decline 5.0 million tonnes to 105 million. While not denying that a drop in the world stocks-to-use ratio is constructive to prices, there were some changes to the world Supply/Demand report that should take some of the bullish edge off the market, especially considering the sharp rally leading up to the report. For example, the market was not expecting to see Chinese exports climb 1.0 million tonnes to 2.5 million. Additionally, major importing nations are projected to produce 2.6 million more tonnes of corn while increasing ending stocks 500,000 tonnes, which should cause these countries to be less aggressive in the world import markets.
PRICE OUTLOOK–SHORT-TERM–Given the 38-cent rally from support at $2.55½ to Friday's high, basis December, and the bullish USDA report, we expect to see corn chop sideways over the next few sessions and then weaken as harvest activity continues. Because the Supply/Demand report showed more demand and smaller ending stocks than we anticipated, we believe it is prudent to raise our downside objectives. Even though harvest is only about 30% complete, December corn has probably already made its harvest low at $2.55½ and may not get down to that level again until expiration, which is too late for commercial users to price fourth- quarter needs. After the market sorts itself out over the next few days, we think that December corn probably will retrace at least 50% of the upmove, reaching about $2.75. We would then entertain ideas of buying March corn around the $2.85 area to carry us through the holiday season.
SWING FACTOR–Continued fund buying, which could prevent the break to $2.75.
LONG TERM–If the market cites lack of farmer selling as short-term bullish, then it will be long-term bearish. Consequently, the March contract could be supported through the holiday season, testing contract highs of $3.07. Considering we are in the midst of harvesting the second largest crop on record, farmer selling in the new tax year will be heavy if prices in January are hovering around the $3.00 mark or higher, a move that should pressure prices lower Into late January or early February.
Tom Levis
Added to the WWW 10-17-97
Last updated on 10-18-97
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com