Grain markets are into their third quarter, and usually, the first month or so of the fourth quarter of the crop year tends to be the most aggressive in price discovery, usually done by mid-July. Will that pattern ring true again this year?
The March 1 stocks report shows that 3.38 billion bushels of corn on-farm storage was less than that of last year at the same time -- 1.2 billion bushels. That means one of two things. First, more corn has moved off of the farms and into commercial hands than what was seen last year, or second, the crop last year wasn't as good as what was forecast by USDA -- a national average yield at 152 bushels per acre. It may be a bit of both, but I think it's more No. 1. The key in corn prices is rationing, and at what level will that start to occur noticeably? The trade recently was estimating corn ending stocks to be at 595 million bushels, down from the March report of ending carry at 675 million bushels.
Looking back at the 1996 corn rally to $5.54, it was the livestock industry that carried the brunt of rationing.
Broiler egg sets and chick placements recently were 102 percent more than year ago levels. So, no rationing there, with hog and cattle board crush spreads remaining solidly above the lows seen in the past 45 days. Looking through the past 27 years of summer rallies in December corn, last year was the strongest, with a $1.80 summer rally in response to high temperatures being consistent day and night and a bullish June 30 stocks report. The year 2009 saw a smaller rally, as the market finished its rally in early June, coming off stocks of September 2008 forecast at 1.6 billion bushels, but world economies were settling down and starting to turn along with a dollar that had been in decline from March highs.
The rally that year was about 60 cents, while the 2008 rally was about $1.20. The rest of the years were muted and were 30 to 40 cents, other than the drought year of 1988, when December corn rallied nearly $1.40. The story here is that after the nearby corn reaches an equilibrium level after a bullish March stocks report, history indicates that it is November soybeans that tend to have better summer rallies if the weather is favorable.
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In 2010, November soybeans rallied more than $2, and 2007, 2008 and 2009 all saw rallies of $1.70 or more. And the average rally from 2006 back to 1984 tended to hit about to $1 more times than not. More importantly, USDA has underestimated final soy demand on the April crop report by 35 million bushels to 90 million bushels in each of the past seven years.
The year 2003 to '04 stands out as a notable exception as a year when prices rallied late in the year and into early 2004 to more than $10.
Last year, during the April report, USDA underestimated demand by 175 million bushels, while it overstated the corn demand in the 2006 to s'07 fall price rally and again in the following 2007 to '08 April crop report.
Looking at a graph of final U.S. corn demand vs. the USDA April forecast, one would note that only three times has USDA understated demand in April and has overestimated demand in the April report by six times. However, in the final U.S. soybean demand vs. the April report, USDA underestimated soybean demand compared with the final report every year with the exception of three years.
The percentage of underestimating demand on soybeans was greater in those years than in the three years USDA overestimated. Seasonally, April 8 has been a time to buy July soybeans in 13 of the past 15 years, according to Moore Research.
