Corn market blindsided by unusually large U.S. supply revision

Source: By Karen Braun, Reuters • Posted: Thursday, October 1, 2020

FORT COLLINS, Colo. (Reuters) – Quarterly grain stock reports from the U.S. government have the tendency to jolt the Chicago futures market due to their unpredictable nature. That held true on Wednesday, but the main reason for the surprise was something that virtually nobody saw coming.

Sept. 1 supplies of U.S. corn, soybeans and wheat all came in below trade expectations when the U.S. Department of Agriculture released the data, but the corn number stood out the most since it included a large, unprecedented adjustment to prior stocks.

USDA’s National Agricultural Statistics Service (NASS) placed Sept. 1 corn stocks at 1.995 billion bushels, some 11% below pre-report estimates. This was analysts’ second largest over-guess of Sept. 1 corn supply since at least 2005, behind last year’s high-side miss.

That survey-based figure is the smallest Sept. 1 inventory in four years and down 10% on the year, and it represents ending stocks for the 2019-20 marketing year.

It is not unusual for NASS to adjust the previous quarter’s numbers in any given stock report, but the changes are often negligible. Before Wednesday, the largest September adjustment to June 1 corn stocks was an 11 million-bushel cut in 2016.

Analysts were stunned to find June 1 corn stocks 205 million bushels lower than what was reported three months earlier, hence throwing off the Sept. 1 guesses. Some 77% of the reduction came from on-farm stocks.

One thing that was different this year was that NASS moved the review period for the prior year’s corn crop to September from January, in sync with soybeans. Some market participants were vaguely aware of this beforehand, but the potential implications were evidently unclear.

PRODUCTION AND STOCKS

NASS made a fractional increase on Wednesday to the 2019 U.S. corn harvest of less than 3 million bushels, resulting in a crop of 13.62 billion bushels. This number by itself did not push the stocks drastically lower.

However, according to a NASS official, the agency was able to analyze the entire marketing year this month instead of in January since the production review was complete. It seems that NASS reviewed all the components that go into the stocks and decided that June 1 stocks were too high.

That sounds tricky, but it is exactly what happened this January when NASS published Dec. 1 stocks. At that time, Sept. 1, 2019 corn stocks were increased by 106 million bushels. That was totally unexpected as the largest such change in recent years was an unnoticeable 4 million bushels.

But the justification for that move was the same as now: NASS had all the components available for a full season review. In January, the agency confirmed via email that those adjustments stemmed from a review on implied feed and residual (F+R) usage.

However, it is unclear why these two recent stock adjustments were so historically large, and the exact methodology behind the shifts, especially the most recent one, remains a mystery.

AFTERMATH

USDA’s World Agricultural Outlook Board (WAOB) will review the latest figures from NASS ahead of its next monthly supply and demand report due Oct. 9, and there will clearly be changes in store for the U.S. corn balance sheet.

On Wednesday, NASS published executive briefing slides in conjunction with the day’s reports. One of the slides included a 2019-20 corn balance sheet that suggested F+R use at 5.86 billion bushels, above the 5.6 billion estimated by WAOB on Sept. 11.

That would be a 14-year high, some 8% above 2018-19 F+R use, and the largest year-on-year jump in six years.

This demand term is always tricky because it combines the feeding term with a residual that accounts for estimating errors, processing losses or unreported use. If taken solely in the context of feed usage, an 8% increase over the previous year seems on the heavy side given the reported animal numbers.

Taking corn disappearance from June 1 to Sept. 1 suggests fourth quarter usage just above 3 billion bushels, the second-largest ever and 4% below 2018’s record. Compared with the same period in 2018, June-August 2020 ethanol production was about 17% lower and exports about 31% lower.

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