In my 7 years of closely watching grain markets there have been maybe 3 or 4 reports that have changed consensus thinking: make no mistake USDA’s 30 June 2010 report was one of these.
Over the past couple of months we have been slowly watching grain market sentiment change. Dryness in China, the big wet in Canadian and now an early European spring have finally changed analysts views on the future direction of stocks (most are now expecting end stocks to fall by the end of 2010/11). But our optimism was being kept in check by strong prospects for the US corn crop.
Fast-forward to last week’s USDA report and the surprise 30 June corn stocks number. This was much lower than anyone had been expecting and meant that corn use in March-May was record large and 25% higher than the previous year.
The USDA use these stocks numbers to recalibrate their production numbers and many believe the lower stocks figure suggests the USDA have been overestimating the size of last year’s corn crop. You may recall us voicing doubts about the size of the 2009 US corn crop due to low test weights and poor grain quality.
So essentially the USDA report has wiped out a big chunk of available supply that everyone had factored into their calculation. The much lower stocks position will place increased pressure on the current US crop to come in with big yields (remembering that corn demand will rise again in 2010).
In our eyes the USDA has taken away the safety net under global coarse grain supplies. End users should become more inclined to buy now and ask questions later as another production issue could quickly tighten stocks to uncomfortable levels.
With the stocks buffer being taken away, markets will now be much more sensitive to developing production issues such as dryness across Western Australia and anything that threatens US corn crop yields.
Expect volatility to increase over the next few months as northern hemisphere yields are made and as southern hemisphere crops enter spring. We are targeting >A$240/t wheat prices and feed barley values >A$220/t, but won’t be willing to take on much production risk to achieve these. We were looking for something to finally sway grain market sentiment and in last week’s USDA report we may have got it.