The Corn Numbers Continue to Change

July 01, 2010

Name: Dennis Smith

Company: Archer Financial Services

Years Trading: 21

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The Corn Numbers Continue to Change
By Dennis Smith, Archer Financial Services

The USDA issued a "shocker" of a report on Wednesday that sent corn prices limit up. Futures did not lock limit up, but came within a whisker of doing so. The report indicated, in a matter of speaking that demand for corn continues to exceed expectations and they also indicated the size of the corn crop will be smaller than expected. The numbers are dramatic, especially given that fact that prices have recently dropped over 40 cents and finished at contract lows on Tuesday. The supply situation facing corn is tight and could become extremely tight if actual yield falls short of projections and/or expected demand comes in above expectations.

Let's quickly push a pencil to the numbers and arrive at possible ending stock projections. Quarterly corn stocks came in at 300 million bushels below expectations, indicating better corn usage than anticipated by the trade. Being conservative and taking only half of this figure off current projected ending stocks gives one a corn ending stock projection for 2009/10 of 1.453 billion bushels. This is 200 million lower than ending stocks last year (2008/09), which were pegged at 1.673. Keep in mind we're now talking about a significantly lower ending stock projection despite a record large crop that was harvested last fall.

Moving forward we'll take the conservative 1.453 ending stock projection and apply it to projected production for this year. But wait, also contained in today's report was a downward revision in corn acreage compared to their March 31 figure. The USDA has lowered corn planted acreage to 87.87 million acres compared to 88.80 million projected on March 31st. This decline in acreage of one million acres was not only a surprise, but a dramatic surprise compared to the fact that most traders were looking for a higher acreage figure compared to the March 31st figure. The average estimate was looking for 89.30 million acres devoted to corn production. Thus, the trade was off by 1.4 million acres.

Doing some math and using my new projected ending stock figure for this year, (1.453) and using the new harvested acreage number provided by the USDA today, we can crank out different ending stock projections, depending upon various yields. Again, being conservative, I'll use the same demand projection for new crop that the USDA used last month. Here's what I come up with:

81 million harvested acres times an average yield of 163.5 gives one a crop of 13.244 billion bushels.
81 million harvested acres times an average yield of 164.7 gives one a crop of 13.340 billion bushels.
81 million harvested acres times an average yield of 168.0 gives one a crop of 13.600 billion bushels.

Taking production and adding ending stocks for this year of 1.453, you have total corn available for use of:
163.5....14.697 billion bushels
164.7...14.793 billion bushels
168.0...15.053 billion bushels

Subtracting the demand figure used by the USDA 30 days ago gives the following projected ending stock levels for a year from now: 1.287, 1.383 or 1.643. Thus, if the national average corn yield comes in below 165 bushels per acre, we're looking at lower ending stocks one year from now compared to this year and substantially lower than last year. Keep in mind this has occurred despite two consecutive record large crops. Finally, I'll throw in the question; what happens if China decides to come in and purchase 4.0 million tons of corn over the next 12 months?

It's my opinion the corn market has just made a major bottom. My first upside target, basis the December futures is $4.10 with a longer term upside target of $4.50.

If you would like a free two-week trial to my evening livestock wire which also contains a grain section, please send me an email at dennis.smith@archerfinancials.com or call me at 1.877.377.7905.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.

About the Author

Dennis Smith has been a full service commodity broker specializing in grain and livestock trading for over 20 years. Dennis has a wide range of customers, many of whom are grain and livestock producers. Dennis develops and helps execute hedging and speculative strategies in his Daily Livestock Wire which is prepared each afternoon exclusively for his customers. Dennis grew up in Central Illinois before launching his brokerage career.