Corn: The Price Is Close To Equilibrium

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Includes: CORN
by: Oleh Kombaiev

Summary

The USDA raised its forecast of global consumption and lowered the forecast of global corn ending stocks in 16/17.

It is quite disappointing that the USDA projection changes mainly occurred due to China.

The prospects for further growth of domestic corn consumption in the United States raise doubts.

The WASDE report published on February 9, at the first glance, can be called positive for the corn market. The USDA estimated the global corn ending stocks in 16/17 at the level of 217.56 million tons, which is 3.42 million tons less than the January forecast and below the minimum expectations of analysts.

The reduction of the forecasted balances was due to the global corn consumption estimates, increased in the current season to the level of 1033.03 million tons, which is 6.07 million tons above the USDA January forecast. It is worth noting that in February the USDA increased its forecast of the global consumption of corn for the fifth time in a row.

So, as I have already noted, the changes seem positive. However, the fact that the key reason for the revision of the USDA forecasts is China, radically changes the situation. Due to the increased forecast of corn consumption in China, the ending stocks forecast in this country was reduced by 4 million tons, followed by the revision of the global corn balance. However, I would like to notice that China takes almost no participation in the global corn trade, which means that any changes in the USDA are more formal than fundamental in nature.

Moreover, assessing the changes in the global supply and demand balance of the corn market with the stock-to-use ratio without including China, it should be noted that, in February, the coefficient has even risen slightly to the level of 14.37%. This means that, in fact, the February USDA forecast indicated that the increase in supply still outstrips the demand growth in the global corn market.

The USDA lowered its forecast of the U.S. corn ending stocks in 16/17 by 0.89 million tons to the level of 58.93 million tons, that virtually coincided with the expectations of analysts. The revision of the U.S. balances forecast occurred predominantly through the increased forecast of corn consumption for ethanol production. However, it was not difficult to foresee, given the current record level of ethanol production in the United States.

So, in my opinion, the USDA February forecast of the corn market is mostly neutral.

As of the first week of February, the accumulated U.S. corn export together with the outstanding sales amounted to 41.189 million tons. This is 72.9% of the USDA forecast for the current season, that is an average indicator for this time of the year. In general, the U.S. corn export is moving at the established speed without surprises.

In the first week of February, the daily volume of ethanol production in the United States amounted to $1.055 million barrels, which is slightly below the January highs:

The ethanol stocks in the United States surpassed 22 million barrels for the first time since April last year:

Due to the fact that China has introduced the tax on DDGs imported from the U.S., the American ethanol producers' margin is reduced. I think this factor will affect future production of ethanol in the United States, and, therefore, you should not rely on the continued growth of industrial corn consumption.

Conclusion

Generally, in my opinion, the corn futures market is approaching the state of equilibrium, since there are no new drivers able to give a powerful impetus to the market. A month ago, I predicted that corn futures price would reach $3.80. I believe, this will happen, followed by formation of a lateral trend.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.