USDA Reports-Food for Bears!

On January 10, USDA issued reports for Crop Production, Grain Stocks and Winter Wheat Acreage along with current Supply and Demand estimates. While the changes were not large, most of the information was price negative. Grain supplies remain tighter than in recent years, but not as snug as earlier estimates. This relaxing of supply concerns triggered selling by speculators and resulted in sharply lower grain prices following the reports.

Total estimated corn supply was only up 1 million bushels, but feed use projections were reduced 75 million bushels and exports reduced by 50 million. Ethanol use continues to grow and industrial use was increased 45 million bushels. The net effect was projected ending stocks of 924 million bushels, an increase of 81 million over last month's 843 million estimates. Historically, this is a relatively small number. However, it was an increase and increases in ending stocks estimates are seen as negative information.

USDA increased soybean production by 40 million bushels, cut domestic crush by 5 million and increased exports by 30 million. The net was an increase in projected ending stocks of 15 million bushels for a total of 190 million compared to last month's 175 million, which is negative to price.

Weak demand continues to be the problem for wheat. Decreases in expected feed use and exports, offset partially by a small reduction in imports, produced estimated ending stocks of 418 million bushels-70 million bushels higher than last month's 348 million, which was bearish news.

"Smaller ending stocks just don't seem to raise prices like the used to!" Many have been disappointed that current tight grain supplies, both domestically and worldwide, have not resulted in sustained rallies and much higher prices. But tighter supplies do not appear to concern to market participants, why?

The current projected corn ending stocks are projected to be the 4th lowest in more than 25 years! While that statement is true, and it sounds dramatic that about 85% of the time supplies have been much higher. It is also true to say that the current ending stocks projections are only the 4th lowest in the last 10 years! The markets are less likely to get concerned about current supplies, when ending stocks have been lower almost one-third of the last 10 years. Improved genetics and rapid response by farmers worldwide to increased prices makes short supply less of a market concern-at least until someone has to deal with a real shortage!

The situation is similar for wheat. The December ending stocks estimates were the lowest since 1973-74. This month's increased estimate makes ending stocks the second lowest since 1973-74, but they are also the second lowest in the last 10 years. The second lowest ending stocks in 10 years are much less dramatic than last month's lowest in almost 30 years!

In spite of strong demand growth, the World is also much more comfortable with lower ending stocks of soybeans because of increased soybean production in South American. Adding to bearish ending stocks estimates, most recent reports indicate that Brazilian weather conditions have improved and indicate another good crop in South America. With a new crop every 6-months, a large soybean carryover supply is not considered necessary.

USDA report estimates were not good news for those with 2002 crops in storage. While market signals (basis & carry) have discouraged storage throughout the fall and early winter, producers have stored grain in anticipation that tight supplies would result in higher prices. It now appears that higher prices won't come from the supply side, it will take demand. Discouraging wheat demand, disappointing corn exports and expectations of reduced feeding along with reduction in domestic soybean crush have pressured prices. Any improvement in domestic or export use, along with any production disappointments in South America could rekindle prices and offer another chance for old crop sales. Loan use may also tie up supplies. Many producers are opting for the government loan to provide cash and delay sales, what price will it take to pull this grain out from under loan? As spring approaches, planting intentions and early season weather will also impact prices. While these may offer an opportunity for old crop prices, the USDA report numbers and the markets appear to be saying, "don't expect tight supplies to result in high prices!"

"Bidding for Acres"

High fall wheat prices suggested to many market analysts that a shift to more wheat acres would occur in 2003. The Freedom-to-Farm provisions of farm legislation have resulted in fewer wheat acres and more soybean acres in the Plains and western Corn Belt in recent years. The past year's shorter wheat supplies, dry weather and higher wheat prices suggested a shift of soybean acres to wheat.

USDA's January 10 reported winter wheat plantings was somewhat of a surprise to many analysts. While USDA's estimate of 44.2 million acres was a 6% increase over 2002's 41.7 million acres, it was less than trade pre-report expectations of more than 45 million acres. Spring wheat plantings and final numbers are still to come. However, declining wheat prices since early fall may not have encouraged the 2003 wheat acreage increase some anticipated.

Market analysts have also expected a similar shift from soybeans to corn acreage in 2003. Higher corn prices than recent years, a higher corn loan rate and lower soybean loan rate would appear to suggest a shift to more corn acres. But like wheat, corn prices have continued to slip since early fall. Is the market really providing signals for increased corn plantings?

Historically, many have used a soybean/corn price ratio of about 2.3 /1 to 2.5/1 as a breakeven for deciding to plant soybeans or corn. For example, $5 soybeans and $2 corn produce a ratio of 2.5/1. If soybean prices rose above $5 while corn prices remained at or below $2, the ratio would favor soybeans. In contrast, if corn prices rose above $2 and soybeans stayed at or slipped lower than $5, the ratio would favor corn.

What is the current soybean/corn price ratio? On January 14, December '03 corn closed about $2.39 and November '03 soybeans at near $5.06. Assuming a harvest time basis of minus thirty-five cents for both crops (typical of many Missouri locations in recent years) gives the following expected cash delivery prices: Corn $2.04 ($2.39 minus $0.35 basis) and Soybeans $4.71 ($5.06 minus $0.35). However, these prices produce soybean prices below loan price ($5.00) and at the LDP would be available to support net price back near $5.00. Using $5.00 soybeans and $2.04 corn, the ratio is 2.45/1which, for many producers, favors soybeans over corn.

Depending on the expected yields, the breakeven ratio for many Missouri producers may be even lower. Using Missouri Farm Business Management crop budgets ( http://agebb.missouri.edu/mgt/budget/index.htm) and mid-level yields, it appears a soybean/corn price ratio of 2.0/1 might be more appropriate when basing decisions on total costs of production. If only operating costs (seed, fertilizer, chemicals, fuel, repairs) are used to decide, the ratio is even lower at about 1.8/1.

As corn and soybean prices decline toward government loan price, it becomes a valid question as to whether the market is offering any signals to shift acres from soybean to corn production. Loan prices produce soybean/corn price ratios that are in the traditional breakeven range. However, for many Missouri producers the breakeven ratio may be much lower and continue to favor soybeans over corn. Will this produce a lower corn acreage response, similar to winter wheat, for the planting intentions report? If so, it could set the stage for continued tight corn supplies and potential price volatility.