This morning’s USDA crop update probably failed to derail the rally in corn prices coming off the June 30 shocker report, the latter having showed corn planted acreage and stocks way above what trade pundits had figured.
July (old or current corn crop) futures plummeted over 70 cents and December new crop hit $5.76 after that bomb, but the latter has since rallied up to $6.37 yesterday, on the back of a reported 500,000 ton export sale to China.
This morning, the USDA estimated 2011 corn production up a benign 270 million bushels to 13.47 billion bushels and the carry-out for next year up 175 million bushels at 870 million bushels. The trade had guessed as much as 1 billion bushels so corn should be up this morning rather than down 9.5–11.75 cents as it is currently indicated in the pre-open.
The USDA upgraded both production and demand for corn in 2011/2012, raising production to incorporate the June 30 NASS estimate for planted and harvested acres of 92.3 million and 84.9 million respectively, based on survey data collected in late May/early June.
It should be noted these acreage estimates are being treated with skepticism as flooding in the Northern Plains and wet weather in the Eastern corn belt no doubt caused some of these planted acres to be abandoned or replanted with beans. The USDA has already made plans to resurvey grain planting in the States of Minnesota, Montana and the Dakotas.
Higher estimated corn use in 2012 for feed (50 million bushels), ethanol and industrial (95 million bushels) and exports (100 million bushels) causes 245 million bushels of the increase in production to be used up, resulting in the modest expected 2012 stock carryout of 870 million bushels and a stock-to-use ratio of 6.6%, still very low by historical standards.
The USDA also reported modest increases in estimated U.S. wheat production (2.106 billion bushels versus 2.058 billion) and the 2012 carryout estimate was dropped marginally to 687 million bushels versus 670 million prior. The production estimate was increased in spite of the extremely poor condition of the winter wheat crop in Texas and Oklahoma.
Soybean production was estimated down 60 million bushels to 3.285 billion and estimated carryout reduced to 175 million bushels from 190 million, supportive of higher bean prices.
The upshot of today’s report is that the estimates for production and stocks were benign, and there is a good chance estimates for corn and wheat harvestable acres and production will the reduced once the USDA updates the market on August 11.
We continue to like the fertilizer stocks CF Industries (CF) and Agrium Inc. (AGU), but would be cautious if you are a leveraged trader or a risk averse buy and hold investor. Poor stock market conditions are hampering the upside on oil and other commodities, although the markets seem to be favoring food and fertilizer stocks as they are basic necessities. CF is in a trading range of about $139 to $150 and we would be careful going into the Q2 earnings season as disappointments could cause substantial volatility.
CF is tentatively scheduled to report Q2 earnings on August 4 after the market closes and Agrium reports August 3.
The Mosaic Company (MOS) was hit with another preliminary injunction stopping it from mining its South Fort Mead mine. The stock was down over 5% yesterday. We expect the injunction to cost the company about 33 cents in fiscal 2012 EPS. We would avoid the stock. Mosaic reports July 18.
Disclosure: I am long CF.
Additional disclosure: This information was disseminated to clients and subscribers of the BCMI Report and the BCMI Flash anywhere from 12 to 48 hours prior to appearing on Seeking Alpha.