Grain Supplies Somewhat Tighter

USDA made only small changes in the December 10, 2002 Supply and Demand Reports. Corn export projections were cut 25-million bushels (about as expected), but ethanol use was increased 30-million bushels. These changes reduced ending stocks by 5-million bushels to 843-million bushels. Soybean exports estimates were increased 10- million bushels, lowering ending stocks to 175-million bushels. Wheat ending stocks were trimmed 10-million bushels by a corresponding increase in expected food use. While these changes were relatively small, most pre-report trade expectations were for changes that would increase (instead of decrease) ending-stocks.

Corn and soybean prices reacted positively and were somewhat higher for the week ending December 13. During the holiday season, market volume is usually low. This may produce volatile and uncertain price action through year-end. Supply remains much tighter than in recent years, but the small December report adjustments didn't change the overall totals much and the markets will now look ahead to final production numbers, domestic use, export progress and South American weather as 2003 begins.

Why Are Corn Prices Not Higher?

At 848-million bushels, projected corn ending-stocks will be the second lowest in more than 20-years! Only 1995-96 corn ending stocks (426-million bushels) were lower and that was the year of record corn prices! So, shouldn't corn prices be higher?

Prices did react to the dry summer weather that reduced production, rising eighty-cents or more in some futures contracts by early September. However, since that price peak, prices have declined nearly sixty-cents-producing futures prices similar to early summer when the market was expecting larger supplies and ending stocks of 1.4-billion bushels or more. Why isn't corn $3, or better, instead of unable to move out of the lower half of the $2 range?

The answer to why corn prices are disappointing may be found in demand. The following table illustrates the reasons for the market's lack of concern for tight corn supplies.

Total Supply (Billion Bu.)		10.618
Feed	5.675
Industrial & Food Use	2.170
Seed/Other	.030	-7.875
		2.743
Exports	1.900	-1.900
Carryover (Excess Supply)		.843

Feed use is expected to decline from 5,874-billion bushels lat year to 5.675 -billion bushels this year. Ethanol use will increase, but total domestic corn use is estimated at 7.875-billion bushels. Subtracting the domestic use from the total supply of 10.618-billion bushels leaves 2.743-billion bushels. This is more than enough to meet USDA's projected exports of 1.900-billion bushels-the U.S. won't run out of corn with these levels of demand!

The slow pace of exports has been the main negative factor for corn prices. USDA's export projection (1.9-billion bushels) is a small increase over last year's 1.889-billion bushels. However, corn exports have been running 16%, or more, behind the pace of last year and may not reach USDA's projection! Will exports improve? World grain supplies are tight, but Chinese corn exports have replaced U.S. corn in several important markets and raise concerns that exports will continue to be disappointing. If exports don't measure up to expectations, the pressure on tight supplies will be reduced and prices may slip lower. In addition, most analysts expect corn acreage to increase in 2003 leading to greater supplies next fall and significantly lower prices.

Not all demand news is bad. Relatively strong cash basis and the small amount of futures market carry signal strong underlying demand for cash corn. Competing feed grains (grain sorghum, wheat, etc.) are also in tight supply, suggesting (to some) that corn feed use is underestimated. Stronger than expected feed use, along with growing ethanol demand, could increase domestic use beyond current estimates. Additionally, while U.S. exports have been slow, World coarse grain supplies are actually smaller than in 1995-96, suggesting that the export pace could increase and eventually meet or exceed USDA projections. These factors suggest prices could improve and production problems in 2003 might send prices sharply higher.

Summing up, a great deal of price risk remains in the corn market. Reduced feed demand and disappointing exports suggests that supplies are more than adequate. If exports don't measure up to expectations, adequate supply along with increased new crop production points to lower prices. However, strong cash market demand signals hint that projected corn use could be underestimated. Stronger than expected demand, along with any production concerns, could produce sharply higher prices.

Market risk and uncertainty make flexible marketing strategies necessary. Selling cash corn to capture strong cash market basis and avoid storage losses suggested by small futures market carry, continues to look like a good strategy. Re-owning corn, by purchasing futures contracts or call options, offers the flexibility to capture any higher prices. Many will prefer call options to reduce downside price risk and option premiums (cost) are similar to storage costs of holding cash grain.