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A Look at Feed, Residual Use
This morning's USDA Grain Stocks report was surprising, as has been the tendency for these stocks reports for the past year and a half. Soybean stocks were expected to be around 225 million bushels, and the actual figure was a little tighter at 215 million. No surprise there. However, corn and wheat stocks were both larger than expected by most of the trade, and the markets have treated that surprise harshly. USDA put corn ending stocks at 1.128 billion bushels vs. its own estimate two weeks ago of 920 million bushels. USDA put wheat stocks for the first quarter at 2.15 billion bushels, vs. the average trade guess of 2.035 billion. This came despite a slightly smaller-than-expected all-wheat production number of 2.008 billion bushels. Translation: we used less wheat than expected in the first quarter, and used a lot less corn somewhere in the past year that USDA is still trying to explain. There are basically three categories of corn use: food, seed and industrial (FSI); feed and residual; and exports. The export number is fairly well known via the export inspections and export sales reports, although Census tends to find a few more bushels exported when they add up the paperwork than what the Foreign Ag Service (FAS) picks up. You would think industrial use would also be a fairly solid number, with EIA issuing weekly ethanol production reports and ethanol accounting for roughly 78% of FSI use. (More on that in a minute.) In the third category, we describe residual use as "it is gone and we don't know where it went." However, it is also possible to have negative residual use, which translates to: "We found it but we don't know where it came from." I have suggested to USDA that they split out the residual use from the feed use in order to provide more transparency. They replied (correctly) that feed use is also residual use, because they don't actually survey for it. Thus, they saw no reason to split the two. In this case, however, it appears that we may have found some corn, and it is showing up on paper as negative feed use. Here's the rub. The stocks numbers reported by USDA this morning imply fourth quarter corn use at 2.542 billion bushels, which is smaller than last year's 2.602 billion bushels. That would be understandable if wheat feeding was up, or if livestock numbers were down. Neither is the case. First quarter wheat use (also for June-August but a different marketing year) appears to be 747 million bushels vs. 762 million last year. That may be off a couple million bushels, depending on the level of imports of Canadian wheat. The implied wheat feed use for the quarter is only 215 million bushels, which is down from 260 million last year. That is the lowest implied first quarter wheat feed use since 2006! USDA had been anticipating that more wheat would be fed and thus substituted for corn. These numbers suggest less corn fed and less wheat fed as well. However, we have more cattle on feed and more market hogs than we had a year ago. The question becomes "What were they eating?" A few less chickens doesn't explain it. It has to be a large negative residual use of corn that is masking more corn feeding than is shown in the balance sheets. There are several ways to get that negative residual. It has been known for some time that USDA overestimates the quantity of corn consumed by ethanol production. It uses a lower average ethanol yield per bushel than the industry actually experiences, which makes it look as if more corn is used. Some ethanol is also derived from wheat or grain sorghum. There is also the matter of the 17-plus pounds of DDGS from each bushel that is produced as a byproduct of that ethanol production. Some of it is exported, and the rest of it is fed to livestock instead of corn or soybean meal. The DDGS exports are not explicitly accounted for in the corn supply and demand table. With higher ethanol production than last year, the supply of DDGS is larger than last year. However, we know that China bought fewer cargoes of DDGS this year, due to concerns about the anti-dumping case brought by China against the U.S. With export trade down, that likely means more DDGS was fed to livestock domestically, resulting in fewer bushels of whole corn being used. Again, that will depress old-crop livestock feed use in the October WASDE report. Both the ethanol yield and DDGS adjustments would be bearish, and potentially continue to cause balance sheet trouble in 2012, unless the methodology changes. There is one other potential explanation for the bigger-than-expected September 1 stocks number. That is old crop/new crop substitution. USDA explicitly asks that only old-crop stocks be reported for the Grain Stocks report. However, that same question is not asked (that we know of) for every livestock feeder, ethanol plant and exporter using corn in August. New-crop corn used for those purposes in August would show up in the balance sheets as old-crop feed use, exports, etc., leaving the old-crop corn sitting there in the bin (but in different states). This issue has come up before. If this is the reason for the big stocks number, it is actually bullish. Why? Because that means some new-crop production was actually gone before USDA started counting new crop use on Sep. 1. That can make first quarter (Sep-Nov) 2011/12 total disappearance larger than the livestock numbers and export data would suggest. Thus, it could be longer-term bullish. Unfortunately, we don't get the Dec 1 Grain Stocks report until January 2012. Corn Data
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