Never assume we have too much

The May supply/demand report has now been resigned to the record books and for the most part, both bulls and beans emerged from the post-release action relatively unscathed.  I had commented earlier this week that the May report generally would hold few surprises but that is not to say that it should be considering inconsequential as it technically sets the bar from which we can gauge development, or lack thereof, as we move through the growing season.  The reports themselves, we generally considered to lean towards the positive side as most ending stocks numbers came in towards the lower side of estimates and in the case of beans for next year were well below, and I would contend that when you consider the time of the year and dig just a bit more into the numbers, they have passed control of the ball into the hands of the bull.

Let’s look first at corn.  2016/17 carryout was reduced 25 million bushels providing a little positive head start for the new crop balance sheet. The most obvious, and expected change though came via the total production estimate as with the lower acreage and a return to projected trend-line yields, we will potentially slice 1.083 billion bushels from our production.  While if that we all to come straight from the bottom line, corn would have been limit higher for days but of course with larger carry-in to begin and a projected cut of 345 million bushels in total usage, the 2017/18 ending stock were trimmed by just 185 million bushels.  Regardless of the size of the cut, what is notable here is this will potentially be the first lower carryout in the past five years either a raw number or measured as a stocks to usage ratio.  Simple logic tells us that if ending stocks are trending lower then prices in turn should trend sideways to higher. This is where it becomes fun to play a bit with “what-if” scenarios, particularly knowing that all the risk of the growing season lays ahead.

The most obvious place to look first is yield and while at 170.7, it is nearly 4 bushels below last year, it would still rank as the third highest yield on record.  Of course, at this point there is no accurate way to predict what the final yield will be this year but for sake of argument, if we take the average of the past four years you would come up with a yield of 168.20.  (I intentionally left out the drought year of 2012/13.)  If all else were left unchanged, this yield would cut another 206 million bushels from total production, which does not sound terribly significant other than the fact that it would potentially drop ending stock below 2 billion (1.904) and psychologically I believe that would be positive for the corn market.  Of course, the argument could then be made that any higher price could cut usage but the USDA already sliced the overall corn usage by 350 million versus the current marketing year, primarily through a reduction in exports, taking them down to 1.875 billion.  Keep in mind that if that were…

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