We have another round of January crop reports under our belt, and once again the market was caught flat-footed by the numbers USDA rolled out. Corn prices logged a limit move following a January crop report for the sixth year in a row. Once again, the grain stocks report got some of the flak, as the 9.642-billion-bushel corn stocks as of Dec. 1 were nearly 250 million bushels larger than the trade average estimate. However, the problem (assuming limit-down corn is a problem for you) is really the level of expectation versus reality. USDA is dealing with very large numbers, with annual use of 13 billion bushels. Even a 2% error results in a big surprise.

The 9.642 billion bushels USDA reported may have been larger than the trade average guess, but it still represents a decline of 414.9 million bushels from Dec. 1 of last year. This has implications for basis, the spread between your local cash corn bid and the futures price. Basis tends to be stronger when stocks are tighter, although that isn't an ironclad rule. We'll come back to that.

First-quarter corn use for the United States was actually down 6.2%, due to slower exports, some wheat feeding in lieu of corn, and reduced chicken numbers. Additional feeding of distillers' dried grains likely factors into that decline as well, substituting for feeding whole corn. Ethanol was holding up its end of the use, with strong year-over-year use each month and several record production weeks in December (after the Dec. 1 Grain Stocks tally). USDA chose not to increase its ethanol use projection for the year despite that strong use, probably due to the unknowns surrounding the end of the ethanol blend credit on Dec. 31 and the simultaneous expiration of the protective tariff.

Since most of us have to sell cash corn locally rather than nationally, it is useful to look at the corn stocks and use on a more regional basis. We define the Eastern Corn Belt (ECB) for this purpose as Ohio, Indiana and Illinois. The main Western Corn Belt (WCB) corn states are Iowa, Nebraska, Kansas, Minnesota and Missouri. Here is a summary of the production, stocks and use for those two regions, based on the USDA data

Region	Production (Bill Bu)	Dec 1 Stocks (Bill Bu)	1Q Use (Bill Bu)
WCB	5.892	4.723	1.774
% Change vs. 2010	+0.5%	-5.4%	-2.5%
ECB	3.295	2.727	0.821
% Change vs. 2010	-2.5%	-2.1%	-15.5%

Corn production in the WCB states was actually larger than last year, which is remarkable given the acreage lost to flooding in Iowa, Nebraska and Missouri, and the drought in Kansas. Disappearance from those states dropped 2.5% from last year's first quarter, but was still 1.774 billion bushels. Because the carryover inventory on Sept. 1 was also smaller than the previous year, we find ourselves with Dec. 1 stocks that are 5.4% smaller than last year. Many of you have commented to me about the lack of ground piles outside elevators. With 5.4% less corn, there should not be as much corn stored outside!

The ECB crop was 2.5% smaller, with high temperatures and moisture stress hurting portions of Indiana and Illinois, while Ohio had to wait until June to plant much of its crop and harvested late as a result. Sept. 1 carryover stocks for the ECB were the smallest since 2003 (when there were a lot fewer ethanol plants), which explains the $1 over futures basis bids that were being offered in August and September to producers who still had corn. The tight supply and the late harvest really choked off first-quarter use in the ECB, however. The implied use for September-November is 15.5% smaller than the year before for those three states. Since the new crop eventually became available, Dec. 1 stocks were only 2.1% smaller than last year.

The bottom line is that corn stocks are tighter than last year in both regions, and also nationally. They just aren't quite as tight as the bulls were hoping. The U.S. national average basis is 19 below March futures based on DTN's national cash index price. That basis is 26 cents stronger than last year at this time. While subject to some "ifs," the tighter corn stocks should keep basis bids on the firm side, stronger than last year. The "ifs" would be (1) if demand for ethanol, feed and exports holds up close to year-ago levels; (2) if futures don't have a large rally (which tends to result in weaker basis, as we saw from mid-December to early January); and (3) if producer selling doesn't clump up and overload elevators and end users, causing them to feel comfortable enough with their ownership to slack off on the bids.

The WCB states, with the sharper drop in stocks, would see more relative improvement in bids vs. a year ago. The ECB states had strong bids last year and may not see much improvement. Currently negative feeding margins for cattle and chicken producers (and negative margins for unhedged ethanol production) are a concern, as they could trim buying interest. Tighter stocks don't matter if nobody wants them.

Alan Brugler may be contacted at alan.brugler@telventdtn.com.

(LS/AG)

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