Bulls, Bears and the June USDA Report

USDA's June Supply and Demand Report contained some surprises. New crop (2002-03) corn acreage and yield estimates were lowered. It is unusual for USDA to adjust yield and acreage at this time, especially before the Planted Acreage Report later this month. The changes reflect spring planting delays, poor growing weather and some acreage shifts to soybeans. Wheat production also was lowered reflecting the drought in major wheat states.

Old crop (2001-02) corn supply and demand estimates were not changed. Strong soybean exports and domestic crush contributed to a 20 million bushel decrease in expected ending soybean stocks (240 million bushels). Wheat exports and food use were lowered leading to somewhat higher old crop wheat ending stocks of 659 million bushels compared to 643 million estimated last month.

These and other projections provided a mixture of information for the bulls (looking for higher prices) and bears (expecting lower prices). Some of the arguments for each are:

Bulls:

• Demand is strong. Old crop soybeans exports continue to be more than expected and domestic crush is running ahead of last year's levels. USDA estimated 2001 crop soybean carryover was lowered to 240 million bushels, which is slightly below average for the last fifteen years.
• In contrast to earlier in the marketing year when corn exports were slow, corn export bookings are now running ahead of last year.
• USDA's surprising corn yield and acreage cut results in projected 2002-03 ending corn stocks of 1.301 billion bushels-a 320 million bushel reduction from the current year and the smallest ending stocks since 1996-97!
• U.S. wheat production is the smallest since 1988-89.
• World grain supplies also are beginning to tighten up. World coarse grain production and stocks are expected to decline. Smaller U.S. crops will contribute to lower world corn and wheat ending stocks.

• USDA expects soybean acreage to increase. After planting delays, Eastern Corn Belt weather and crop conditions are rapidly improving.
• USDA's Supply and Demand Report production estimates suggest that 2002 will produce the 4^th largest corn crop and 2^nd largest soybean crop with soybean ending stocks expected to increase in 2003.
• Old crop corn exports still are projected to be less than last year and wheat use is the lowest since 1985-86!
• Record oilseed production is occurring worldwide and World soybean ending stocks are expected to increase.
• South American soybean exports are delayed by a slow Brazilian export pace and economic problems in Argentina. However, these supplies eventually will provide export competition and may negatively impact 2003 -03 soybean export sales.

With this confusing mixture of bullish and bearish factors, it is important to recognize that it is a somewhat different market picture than was the case in recent years. Technically, soybean prices are trending up since January and corn appears to have broken the downtrend in place since last summer. Grain supplies are showing signs of growing tighter. The current projections for 2002-03 crop ending stocks are significantly less than projections for the 2001-02 crops were at this time last year. The world has become used to abundant supplies and low prices, which encourages corn and soybean use. This strong use depends upon good growing conditions and large production. This creates a situation that could produce higher price selling opportunities-depending upon weather and production expectations. It also could have negative impacts on livestock producers and some added value enterprises, as higher grain prices would increase input costs.

A bullish scenario, along with the new farm bill provisions may require a much different marketing strategy this year. Successful marketing strategies of recent years have focused on bearish expectations for fall prices, maximizing LDPs and capturing storage gains along with the added benefits of government Market Loss Payments (MLP [sometimes called extra AMTA payments]). Even with higher corn loan prices, December corn futures prices are approaching levels at which there may not be an LDP. Reduced soybean loan rates and higher prices would result in a much lower soybean LDP this year. Higher prices also could impact the CCP (counter cyclical payment). Even if available, the fall CCP will be less than recent year's MLP since only 35% is available at harvest time. In addition, higher harvest time price levels may reduce opportunities to gain from storage and increase the risk of losses if prices declined into next year.

It's shaping up to be a challenging marketing situation. Tighter supplies, strong demand and uncertain production may produce more volatile prices. If production risk is managed with crop insurance, attention can be focused on managing price risk and capturing selling opportunities. This may require a variety of tools including minimum price contracts, hedges and option strategies-especially if prices approach or exceed government loan rates. Other factors to watch as the season progresses are:

• The June 28 USDA Planted Acreage Report-will it confirm the reduced corn acreage?
• Summer weather will be critical following the dry-west/wet-east spring weather pattern.
• July 4th is often the turning point for summer markets-up or down. Crop conditions and weather outlook at this time have a major impact on crop production expectations.
• South American exports and whether they will compete with new crop supplies in the fall.
• August USDA Production Report is the first report using survey results and often sets the tone for the markets into harvest.