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Column: Big U.S. corn stocks could swell further as more gaps may lurk in old-crop demand

FORT COLLINS, Colo. (Reuters) - There are just under 16 weeks left in the 2019-20 U.S. corn marketing year, and balance-sheet shakeups are still in progress, particularly amid the unprecedented fall in ethanol production.

A cornfield on the Hodgen Farm In Roachdale, Indiana, U.S. October 29, 2019. REUTERS/Bryan Woolston

The U.S. Department of Agriculture has recently made some aggressive changes to projected corn demand as a result, with the latest adjustments coming on Tuesday. Some of those moves warrant additional scrutiny, as they could drastically alter the expected supply levels four months from now.

That is especially the case with corn used in the making of ethanol, as production rates still must recover significantly, and quickly, in order to prevent more corn demand from being lost.

Perhaps the biggest surprise on the U.S. corn balance sheet on Tuesday was that USDA’s estimate of 2019-20 ending stocks was virtually unchanged from the previous month following some shifts in demand. The average pre-report trade guess was 6% higher than the actual figure of 2.098 billion bushels.

This likely contributed to analysts’ slight over-estimation of new-crop stocks, which came in at 3.318 billion bushels, the highest in more than 30 years.

Stockpiles could become even more burdensome if USDA has gone too aggressive on old-crop demand, as that will spill over into the 2020-21 year starting Sept. 1. Corn use for ethanol will remain in focus, but the feed and residual term needs to be watched just as closely.

ETHANOL

Since March, USDA has eliminated 475 million bushels of U.S. corn use for fuel ethanol production in the 2019-20 marketing year because of the sharp decline in oil demand due to the coronavirus pandemic. Tuesday’s full-year estimate of 4.95 billion bushels would be a seven-year low.

In the week ended May 8, U.S. fuel ethanol output averaged 617,000 barrels per day, up 3% on the week and up 15% from the all-time low set two weeks earlier. Earlier in 2020, before the virus outbreak, output was averaging around 1.05 million barrels per day, so production in the latest week was still off around 40% from “normal” levels.

U.S. ethanol stocks fell for the third week in a row through May 8, to 24.19 million barrels, down 13% from the April 17 record high. The latest stocks number is roughly equal to the average inventory levels in the first 12 weeks of the year, pre-virus.

Given that stocks are no longer off the charts and U.S. ethanol margins have improved a bit this week, bigger production jumps than have been recently observed are possible over the next couple of weeks.

The recent changes in stocks and production imply that daily ethanol usage in the week ended May 8, about 820,000 barrels per day, was up 72% from the all-time low set in the week ended April 3. It is still down 23% from the week ended March 20, the last “normal” week in the dataset.

That suggests the demand low is in the past, barring a worse resurgence of the virus that would lead to countrywide closures of similar or worse magnitude than before. Trends in U.S. gasoline demand, which is still well below average but had surged 39% in the three weeks ended May 8, also support the theory.

It can be estimated that some 300 million bushels of U.S. corn demand had already been lost through May 8 by way of reduced ethanol output, leaving only about 175 million bushels of cushion for the current marketing year per USDA’s latest estimate.

Comparing that cushion with normal, non-virus usage rates would suggest that USDA’s 2019-20 estimate of corn used for ethanol production would not need to be reduced any further if the average reduction in output from normal levels does not exceed 10% between May 9 and Aug. 31.

The exact departures from normal in demand and production are very tricky to predict right now, but so far in 2020, total U.S. ethanol output is about 15% lower than what would have been expected over that 18-week period without any disruptions.

STOCK BOMBSHELL?

Corn used for fuel ethanol production generally accounts for just under 40% of annual corn demand in the United States, and the share that goes to the feed and residual category is roughly the same. Exports account for around 15%.

While USDA has reduced corn use for ethanol, it boosted feed and residual use by 175 million bushels between March and May to 5.7 billion bushels, the highest in 12 years.

Because it is a combined term, feed and residual does not inform on exact usage of corn for feed. But given the recent issues with closed slaughterhouses, low livestock prices and euthanasia, it is difficult to believe that USDA is suddenly more bullish on feed demand, especially since the March estimate had also reflected a 12-year high.

The “residual” portion of that term, which accounts for processing losses, unreported use, and estimating errors, has the tendency to create stock surprises down the road since it is not a trackable number, like ethanol output or exports. If feed and residual demand is overestimated, a bearish stock shock could be in store.

When this number grows larger, particularly when market conditions might suggest a decline is more feasible, traders should be on alert. They should especially pay close attention to the quarterly grain stocks reports, which is where these issues are likely to manifest.

USDA increased U.S. corn exports for 2019-20 by 50 million bushels on Tuesday to 1.775 billion, adding just a little more pressure to old-crop demand. Sales and exports of U.S. corn over the last two months have been some of the strongest in a year.

The opinions expressed here are those of the author, a market analyst for Reuters.

Editing by Matthew Lewis

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