Bloomberg News

Russia-Sized Mistakes Driving Corn Prices to Limit: Commodities

March 27, 2012

Corn futures dropped 5.6 percent from a six-month high of $6.7575 a bushel on March 19, erasing this year’s gain. Photographer: Daniel Acker/Bloomberg

Corn futures dropped 5.6 percent from a six-month high of $6.7575 a bushel on March 19, erasing this year’s gain. Photographer: Daniel Acker/Bloomberg

The gap between traders’ estimates of U.S. corn reserves, the world’s second-biggest, and official figures have reached the size of Russia’s annual consumption, increasing price swings at a time of near-record food costs.

Analysts and traders missed numbers reported by the U.S. Department of Agriculture by 225 million bushels (5.7 million tons) on average in the past seven quarters, according to data compiled by Bloomberg. That’s twice as much as in the previous five years and about equal to 12 months of Russian demand. The USDA releases its next quarterly inventory report March 30.

Futures fluctuated by the maximum allowed on the Chicago Board of Trade after six of the past seven quarterly reports, with an average swing of 5.8 percent, data compiled by Bloomberg show. Stockpiles (UGRSCNTO) are getting harder to predict as growers build more silos on their land rather than sending it to commercial grain elevators, making it more difficult to measure.

“Analysts’ errors have swung from too low to too high with increasing amplitude,” said William Tierney, the chief economist for Chicago-based research company AgResource Co. and a former USDA analyst. “The industry has to do a better job.”

Stockpiles probably totaled 6.16 billion bushels as of March 1, 5.6 percent lower than a year earlier, according to the average of 26 analysts surveyed by Bloomberg last week. The 6.5 percent plunge in the average U.S. cash price after the Jan. 12 report erased $3.73 billion from the value of stockpiles, data compiled by Bloomberg shows.

Societe Generale

Corn futures have dropped 5.7 percent from a six-month high of $6.7575 a bushel on March 19, erasing this year’s gain. The grain last traded at $6.37 and Societe Generale said in a March 19 report that prices may reach $7 in the second quarter.

The Standard & Poor’s GSCI Spot Index of 24 commodities rose 9.2 percent since the end of December as the MSCI All- Country World Index of equities gained 12 percent. Treasuries lost 1.4 percent, a Bank of America Corp. index shows. Food costs tracked by the United Nations rose for a second month in February and are within 9.5 percent of the record reached a year ago.

U.S. farmers, the world’s biggest agricultural exporters, reported record cash income of $108.7 billion last year, according to the USDA. They used some of that to build more storage, taking on-farm capacity to 12.78 billion bushels as of Dec. 1, the most since 1989, government data show. The 11 percent expansion since 2006 compares with a 15 percent advance in commercial storage to 10.11 billion bushels.

Pricing Power

Adding grain bins gives growers more control over when they sell crops, and that pricing power is increasing after global output fell short of demand in eight of the past 12 years, said Dale Durchholz, the senior market analyst at AgriVisor LLC in Bloomington, Illinois.

Unusually wet and cold weather reduced the quality and weight of the crop in 2009, he said. Hot and dry weather in the past two years reduced yields while increasing the weight, he said. Farmers get paid for a 56-pound bushel of corn. The quarterly grain stocks estimates are based on surveys of producers and commercial grain companies.

“Estimating on-farm inventories is a problem because of the differences in the quality of the crops the past three years,” Durchholz said. “When the government asked farmers how much grain they have in storage, they don’t know the correct answer because of the variable weight of the crop.”

Renewable Energy

The estimates also may be skewed by the variability of ethanol production. The government said March 9 that about 5 billion bushels will go to make fuel this year, second only to last year’s record. That’s based on the assumption that every bushel produces 2.7 gallons of fuel, said Jerry Norton, the chair of the grain estimates committee for the USDA World Agricultural Outlook Board.

Green Plains Renewable Energy Inc. (GPRE:US), based in Omaha and the fourth-largest U.S. producer, says it can produce 2.8 gallons per bushel. That difference extended across the industry might mean 150 million to 200 million fewer bushels of corn consumed annually by ethanol refiners, Norton said.

“We just don’t have good information on the conversion rates,” he said from Washington. “We don’t know how many gallons of ethanol are produced from a bushel of corn. Our estimate could be high.”

Most analysts derive their forecasts by analyzing USDA data on exports and the Department of Energy’s estimates of ethanol production, according to those surveyed by Bloomberg. They also take into account seasonal demand patterns for starch and other corn-based food products and base their estimates of feed use on the size of domestic livestock herds and poultry flocks.

Distillers Grains

Demand for corn from livestock producers may have dropped 12 percent in the three months ended Feb. 29, in part because they used more dried distillers grains, a byproduct of ethanol production, according to Randy Mittelstaedt, the director of research at R.J. O’Brien & Associates in Chicago. He was the most accurate analyst in Bloomberg’s survey before the USDA’s March 2011 report.

The USDA has “been met by a fair amount of skepticism in the market,” said Shawn McCambridge, a Chicago-based analyst at Jefferies Bache LLC. He was one of the most accurate in Bloomberg’s survey before the USDA report in June, and one of the least before the January number. “The sharp growth in ethanol and the different commodity mix that we’re feeding now, it all contributes.”

Central Illinois

Analysts surveyed by Bloomberg missed the USDA’s forecast for corn inventories by an average of 8.1 percentage points in the past seven quarters, data compiled by Bloomberg show. In the previous 20 quarters, from June 2005 through March 2010, the estimates were off by an average of 2.3 percentage points.

Cash prices for corn in central Illinois, the second- biggest producing state after Iowa, rose or fell an average of 6.6 percent the day of the past four USDA quarterly reports, government data show. That compares with an average of 2.7 percent in the previous 17 years.

“You can figure these numbers and analyze all day and night, but the USDA can come out with whatever they want,” said Jason Britt, the president of Central States Commodities Inc., a brokerage in Kansas City, Missouri. “Whether you believe them or not, we have to take them and trade them.”

To contact the reporters on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net; Jeff Wilson in Chicago at jwilson29@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net


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