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Traders Struggle To Get A Handle On Stocks

Grain traders were moaning recently about how the latest grain stocks report surprised the corn market with higher-than-anticipated corn inventories.

Some even suggested that perhaps the USDA misreported how much grain was stored privately by farmers.

But as a proportion of total on-farm storage capacity, U.S. corn farmers actually stored the lowest amount of their corn in 15 years as of September 1, while off-farm storage was also at multiyear lows. So disgruntled corn bulls must continue to look for another reason why there s more grain lying around than they d like.

Storage on the rise

Since 2005, total grain storage capacity in the United States has increased by 12 per cent, more than two billion bushels, matching the rise in corn production and pushing capacity to more than 22.25 billion bushels, the highest level since 1988. As such, it represents a critical component in the grain production and consumption equation. It simultaneously allows producers to dramatically extend their marketing season and creates buffer stocks of critical inputs whenever attractive purchase opportunities arise.

The growth rate of off-farm storage has outpaced that of on-farm capacity in recent years as major users such as ethanol plants seek to ensure steady access to inputs throughout the year. But overall storage is greater on farm than off, reflecting both the greater prosperity of farmers in recent years and their desire to avoid force selling their crops during the traditional post-harvest price dip.

In theory, this should lead to a smoothing ef fect on crop price action, but may instead be contributing to the increased price volatility because it forces commercial users fearful of bidding wars if supplies get tight to be constantly fighting to maintain their own inventories.

Whether this contributed to price volatility or not, it s clear from the still-ongoing grumbles about the most recent grain stocks report that grain market traders and analysts continue to have a hard time accurately gauging how much storage capacity is being used at any given time.

Confusion reigns

At the heart of the most recent dispute is whether some of the crops counted as part of on-farm storage were in fact already committed to commercial users who intend to take delivery later on. Such an event could result in double counting. But since such accounting discrepancies exist every year, it is unlikely there was any great deviation this year. And even though stocks came in higher than many traders anticipated, they remain tight by historical standards.

Considering that the low corn stocks share of capacity seen in 1996 was due to the fact that the U.S. corn crop that year was sharply lower than the prior year after widespread crop issues, this year s on-farm storage total can still be construed as bullish given that this year s crop remains one of the largest in U.S. history.

So even if actual corn inventories on farm or off were reported to be higher than expected, they were extremely tight as a proportion of overall storage capacity thanks to sustained strength in consumption levels.

Traders who are still scratching their heads over how those stocks levels differed from their estimates can perhaps take heart from that fact, even though the ongoing 2011 harvest is rapidly filling the remaining capacity by the day.

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