The ultimate purpose of price is to ration demand. With a smaller U.S. corn crop produced in 2012, the price had to rise in order to curtail consumption, and that’s exactly what happened. Since the start of the drought concerns in early June of 2012, the price of corn rallied higher in order to “right-size” the demand to the shrunken volume of the 2012 crop. The March 28, Quarterly Stocks Report from the United States Department of Agriculture suggested that the price still has some work to do.
Nobody should be really surprised that the ending stocks of corn were raised in the March 28 USDA Quarterly Stocks Report. In this column on March 1, I wrote about “How Short Crops Grow Long Tails,” and I am not on the insider track on any market information. The fact that ending stocks of corn had to be raised was essentially public knowledge. The surprises were: how big the increase in ending stocks was; and how much the market reacted to it.
To be precise, the USDA raised its estimate of the current corn stocks in the United States by 369 million bushels above what the average of the independent analysts had expected. In finite terms, the adjustment in stocks is not terribly significant. This 369 million bushels only represents about 3.4% of the total domestic crop, and is only about a 7% increase in total inventory, but it does matter because it suggests that the price has been over-steering in managing demand, and a correction is in order. The fact remains that with an estimated corn carry out of 632 million bushels, supplies are still tight, but with nearby corn futures values in the $6.50 range, prices are still historically high as well.
There is really no need to debate whether or not the USDA’s estimates are wrong. In the same way that the local weather forecaster is going to be incorrect when they suggest that the temperature next Tuesday is going to be 10 degrees, the error is in the accuracy of the number and not in the general concept. Grain inventories are still fairly comfortable, especially in consideration of the speed with which we are consuming it.
The impact on wheat prices was essentially collateral damage from the carnage in the corn market. Due to the substitutability of wheat into feed to replace high-priced corn, an increased portion of the world’s wheat has been used in feed over the past crop year in place of scarce corn. The substantial break in corn values washed over into wheat as it fights to maintain its demand in the livestock feed market.
In terms of 2013 crop planting intentions, the March 28 report held essentially no surprises. In fact, it is curious to see how close to last year’s estimates the U.S. planting intentions are. (There are only 100,000 acres difference between this year and last year in both corn and soybean expectations). Looking forward, the expectations for the 2013 crop is a carbon copy of this date last year looking forward to the 2012 crop.
Once the planting equipment heads to the field, the grain markets are essentially all about weather and the growing conditions for the crop which is out in the field. (You’ll recall that in last summer’s drought the prices for 2011 crop which was safely in the bin sky-rocketed on the suffering new crop that was still growing). With the big old crop stocks based price adjustment now behind us, the market should be all about weather from now until harvest.