The Story Behind Quarterly Corn Stocks

By Alan Brugler
DTN Contributing Analyst

USDA's Grain Stocks report is arguably the most significant of the four grain reports released in January, because any production and yield changes for last fall are already included in it, as well as any changes that need to be made to feed and residual use. The World Agricultural Supply and Demand Estimates (WASDE) report simply explains what the Grain Stocks report says has happened, and applies projections for the rest of the year based on trends.

USDA showed almost no change in U.S. corn ending stocks versus a year ago in Tuesday morning's report. The Dec. 1 stocks were 11,211,605 million bushels versus 11,211,380 million last year. Revised 2015 U.S. production was 615 million bushels smaller than 2014, but expected disappearance is 178 million smaller and carryover from last year is 499 million bushels larger. So we're standing in place with just about the same stocks and a cash price average midpoint of $3.60 that is 10 cents lower than the full-year average from last year. Will this year repeat the pattern from last year, going from dull to duller and then exploding in July?

This year isn't as similar to last year as the national numbers might suggest. We really have a tale of two Corn Belts: the East versus the West. The differences between the two areas have major basis implications for those within them. The following table looks at changes from the first quarter of 2014 (Sep-Nov) to the first quarter of 2015. For this study, the Eastern Corn Belt (ECB) is defined as Ohio, Indiana and Illinois. The Western Corn Belt (WCB) is defined as Minnesota, Iowa, Missouri, Nebraska and Kansas.

The ECB had well-advertised problems with too much rain in 2015. USDA had been showing production 733 million bushels smaller, and is now at -712 million. Due to larger carryover from the previous year, the total end-of-harvest supply for the region was down 478 million bushels. On Tuesday, Dec. 1 stocks were shown to be 281 million bushels smaller than last year, implying that first-quarter disappearance was down 197 million from the previous year. Most of this was due to a reduction in export shipments out of the region. Basis bids were much firmer because of the tighter supply, particularly from users with no access to rail or barge corn. It is perhaps surprising that the gap versus a year ago has narrowed to only a 281-million-bushel deficit.

The Western Corn Belt benefitted from nearly ideal growing weather in Minnesota and enough extra rain to pump up Nebraska dryland yields. USDA revised its WCB production estimate higher on Tuesday, and it is now 348 million bushels larger than in 2014. The WCB also had larger carryover from last year, resulting in total supply that was 582 million bushels larger than in 2014. That is a lot of extra corn! Producers in the WCB have suggested the corn isn't really there, due to a perceived paucity of ground piles. However, it's likely that hundreds of millions of bushels of additional storage have been built during the 'good times' and corn is just out of sight.

Please note that the additional supply (and corresponding lower prices) has resulted in additional consumption. Implied use was up 259 million bushels versus the previous year, with most of it going to livestock feeding and ethanol production. At the end of November, the 348 million bushels of additional production had been winnowed down to 323 million bushels of increased regional supply. That is hard on basis bids, because end users know those bushels have to come to town sometime. WCB basis has lagged a year ago, and at times has been 40 to 50 cents weaker than the ECB on the same day.

Cheap fuel has meant cheaper freight, and the availability of the extra bushels in the west is limiting how high basis can climb in the east. Just a couple of unit trains can smooth out any imbalance. Does the Midwest need to do any price rationing, given overall net supplies that were 42 million bushels above the previous year in our eight Corn Belt states, but unchanged from a year ago nationally?

Just matching year-ago disappearance for the final three quarters would draw down WCB stocks to 1.193 billion bushels by the end of the marketing year on Aug. 31. This would be the largest ending stocks since 2005-06 for that five-state region, but of course first-quarter use was larger than last year. We can also presume that at least the livestock-use portion will continue above a year ago due to expansion.

Matching year-ago disappearance for the final three quarters would draw down ECB stocks to 198 million bushels, the tightest since 2013. That leaves very little room for any harvest delays or reduced production in the 2016 crop year.

The flow of grain from west to east is expected to continue in order to keep the ECB from getting that tight. With cheap fuel costs, the basis spreads required to get that movement are smaller than they might be otherwise and is a limiting factor on how high basis premiums can go in the ECB during the tight fourth quarter. Things would get interesting from a basis standpoint if U.S. corn exports pick up enough to try to draw that grain away from the east toward the PNW or Gulf. Any threat of an El Nino- or La Nina-related production cut would also force end users to push harder or switch to using more wheat and milo.

Alan Brugler may be reached at alanb@bruglermktg.com

(AG/BAS)

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