May 10, 2012

First Monthly Supply/Use Estimates for 2012-13

The USDA's May 10, 2012 World Agricultural Supply and Demand Estimates (WASDE) report provided the first monthly estimates for 2012-13 production and use for grains and oilseeds. Corn supplies are expected to rebound and soybean supplies remain tight.

Surprisingly, the USDA lowered old crop corn feed and residual use by 50 million bushels. The result was an increase in 2011-12 corn ending stocks from the previous estimate of 801 million bushels to 851 million bushels. No one in the trade expected this as 801 million bushels was the highest of pre-report estimates. New crop production is forecast at 14.790 billion bushels using the March intended acreage (95.9 planted, 89.1 harvested) and a record forecast yield of 166 bpa. The record yield forecast was based on trend line yields and early planting progress. Total 2012-13 corn supply is projected at a record 15.656 billion bushels. Ethanol use is not expected to increase in the year ahead. Feed and residual use is projected to increase 900 million bushels and exports increase 200 million bushels. Other small adjustments lead to a total projected use of 13.775 billion bushels. 2012-13 corn ending stocks are projected to be 1.881 billion bushels, which is within the wide range of pre-report trade estimated that ranged from 1.209 to 2.072 billion bushels. Global corn carryover is expected to increase in 2012-13 from the current year's 127.6 mmt to 152.3 mmt. The USDA forecast price range for 2012-13 corn is from $4.20 to $5.00.

Increases to old crop soybean crush and exports resulted in a 2011-12 ending stocks declining from last month's 250 million bushels to 210 million bushels. In spite of lower intended acreage, 2012 soybean production is expected to increase (3.205 billion bushels) as a result of higher projected yields (43.9 bpa). Total supply is projected at 3.205 billion bushels, but 2012-13 soybean use is expected to remain strong with increases to both crush and exports in the coming year. Ending stocks are expected to tighten to only 145 million bushels for 2012-13. Global supplies are projected to recover somewhat with better South American production from the current year's 53.2 mmt to 58.1 mmt. The USDA 2012-13 soybean price forecast range is from $12.00 to $14.00.

Wheat production is also projected to increase in 2012 with total production of 2.245 billion bushels based on an average yield of 45.7 bpa. Increases to domestic use and exports are expected to result in 2012-13 wheat ending stocks of 735 million bushels. This is less than the average pre-report trade estimate and slightly below the current year's 768 million bushels. Global 2012-13 carryover is expected to decline from the current year's 197.0 mmt to 188.1 mmt. The USDA's 2012-13 wheat price forecast range is from $5.50 to $6.70

Initial reaction to the report by market analysts was bearish corn, bullish soybeans and neutral wheat. It appears that new crop corn supplies will be more than adequate, but soybean supplies remain very tight even with very good yields. In futures trading following the report corn prices were lower, wheat mixed and soybean prices double digit gains. However, many questions will remain: Will record corn yields be produced? Will wet conditions in some areas and current prices cause some late acreage shifts from corn to beans? Will there be more double crop soybeans after wheat? What changes will the upcoming USDA Planted Acreage and Grain Stocks reports provide in June? These are among many questions still to be answered.

What do market signals suggest? Do the markets "believe" the USDA numbers? Recently, for corn and soybean prices it has become a situation of different markets for different years. Tight old crop corn supplies have led to strong basis with cash bids higher than futures prices at many locations. An inverted corn futures market (nearby futures prices higher than distant months) is another indicator of strong nearby demand for tight old crop supplies with July futures prices more than eighty-cents higher than for the December contract. Declining new crop futures prices and weaker cash bids reflect expectations for increasing corn supplies from more corn acres. Soybean futures prices are also inverted with July about more than ninety-cents higher than November indicating demand strength. Strong soybean demand and expectations for more than forecast exports have also contributed to strong cash basis for soybeans as well.

Outside market factors are coming into play again. Politics and election results in Europe have once again raised new concerns about their economies. This has supported the value of the dollar and helped pressure oil prices along with prices of other commodities. These worries may cause money managers and other non-commercial traders who have accumulated large long positions in soybeans to liquidate their holdings. This would add to risk of lower prices.

Futures market changes may also affect producer pricing risk. The Intercontinental Exchange (ICE) plans to add US grain futures contract electronic trading this month. In response to this competition, the CME Group has announced plans to expand its electronic trading hours on May 21. Trading will be 22 hours from 6 p.m. to 4 p.m. on Monday through Friday and then reopening again at 5 p.m. on Sunday. Although this offers the flexibility of nearly anytime trading, some are concerned about the impact on those who hedge-especially on the days that USDA reports are issued. Currently USDA reports, such as today's WASDE, have been released when the futures market was closed (7:30 a.m. CDT). This gives everyone a chance to "digest" the numbers and decide on a strategy before trade opens. Reports released during trading may add to volatility and make hedging decisions and transactions more difficult for producers and elevators that are not able to react as quickly as large electronic traders and speculators.

It all adds up to a lot of tough marketing decisions in the months ahead. Growing season weather will be critical as the USDA numbers depend upon record corn yields and very good soybean production. It will be important for producers to take advantage of pricing opportunities, but strategies need to include flexibility to deal with market volatility and any new "surprises."