AP Agribusiness Article Errs on Crop Futures

by: Chris Ridder, CFA

I just came across this AP article about today's crop report which states, "The U.S. Department of Agriculture said Thursday that farmers expect 940 million bushels to be left over when the harvest begins this fall. That's up from last month's estimate of 880 million bushels," with the conclusion being surmised in the headline, "Demand for corn falls, food prices could level off."

The facts stated are true; the goof comes when looking forward to the 2011/12 crop year. Here the ending stocks, what is left over, is estimated to be 714 million bushels and down from a reported 870 million bushels last month. This information can be found in the USDA report the article referenced with this link. The article has this to say about ending stocks near this level, "Earlier this year, the USDA estimated that there would be fewer than 700 million bushels of corn left over at the end of this year. That is less than enough to satisfy demand for 20 days. A 30-day supply is the level considered healthy by most investors." Since the 2010/11 ending crop is above this level things are, in error, thought to be better.

Demand for corn did fall according to the report. However, supply fell even more for the 2011/12 crop year; so that next years ending stocks/use ratio fell even with reduced demand. The stocks to use ratio, for 2011/12 season fell from a reported 6.44% last month to 5.43% in August. The USDA raised the corn price projection "up 70 cents on each end of the range". The article goofed by looking at 2010/11 crop year ending stocks and not the 2011/12 stocks since markets are forward looking.

In summary do not be misled by the AP article; it just shows you have to double check the analysis given. I have written before about the potential for a bull market in corn and trading strategies in these articles here and here.

Disclosure: I have a position in corn futures options