The market adage, "large crops get bigger and short crops get smaller," doesn't seem to be holding true this year. The saying refers to USDA's production estimates. In good production years, large crop production estimates tend to increase as favorable weather continues to produce yields exceeding expectations. The opposite frequently occurs in a short crop year as declining crop conditions and disappointing yields leads to lower and lower production estimates. In spite of dry weather and lower production nationwide, better than expected yields in some states resulted in higher corn and soybean production estimates in USDA's November 12 Supply and Demand Reports. Corn: The grain trade was anticipating an increase in estimated corn production. The "good news" was that the increase was less than most expected. Corn production is now estimated at 9.003 billion bushels compared to 8.970 billion bushels in October (33 million bu. increase) and 9.507 billion bushels last year. On the demand side, a 25 million bushels increase in estimated feed use was more than offset by a 75 million bushels decrease in projected exports. These changes caused estimated ending-stocks to rise from 764 million bushels (October) to 840 million bushels and lowered expected average price from $2.50 to $2.40 per bushel. Soybean: USDA's 36 million bushel increased production estimate was in-line with pre-report trade estimates. A slightly smaller domestic crush estimate along with a 40 million bushel increase in export projections produced estimated ending-stocks of 185 million bushels-a 10 million increase over the October estimate, but would be the 3rd lowest ending-stocks in more than 10 years. Estimated average price was lowered to $5.40 compared to $5.50 in the October reports. Wheat: United States wheat supplies remain tight. The only change in the November estimate was lower spring wheat production. Projected U.S. ending-stocks are 358 million bushels (371 million in October) and the lowest since 1973! The major change affecting wheat was a large increase for estimated Chinese wheat supplies. This revision goes back more than ten years. While it increases total World wheat stocks, worldwide ending-stocks are still expected to decline-just from higher levels. Average projected wheat price was increased from $3.75 (October) to $3.80 per bushel. In spite of USDA's increased estimates, grain supplies remain much tighter than in recent years. Use of corn, soybeans and wheat is expected to exceed production of each crop. While there may be additional adjustments to 2002 crop production, expect market focus to begin shifting toward demand, South American production and U.S. production prospects for 2003.
Market expectations of "better than expected" corn/soybean yields, slow corn exports and harvest pressure has resulted in prices significantly below pre-harvest price levels. Based on tight grain supply outlooks, expectations of higher prices and maybe the need to manage cash income taxes; many producers have stored corn and soybeans. Market signals continue to discourage this strategy! Futures market carry (price premium for deferred month futures contracts) represents what the futures market is offering to carry (store) the grain until the deferred contract month. Carry in the corn market has continued to shrink. March corn futures (Thursday, November 14, 2002) closed at $2.44 ¼ compared to December at $2.40 ½, producing a carry of just 3 ¾ cents-well below the cost of storage! The May corn futures contract at $2.46 ¼ only offered 5 ¾ cents for storage over the longer period. Carry in the soybean market is even worse. Recently the soybean market has been "inverted" with deferred month futures prices discounted to the nearby month-suggesting negative returns for storage! Basis (difference between cash and futures prices) is the cash market signal for delivery or storage of grain. Weak (wide spread between cash and futures price) indicates the market does not want cash grain and signals avoiding sales by storing grain. A Strong (narrow spread between cash and futures) indicates the market desires grain delivery and signals it is time to sell cash grain. Corn and soybean basis is currently much stronger than recent years, offering less potential for gain from narrowing (strengthening) basis. Strong basis, combined with lack of futures market carry, suggests that demand is strong, markets want grain now and cash prices may be lower later on. While there are good arguments for higher prices, higher prices are not likely to be a result of market storage returns (carry) or improved basis. It appears that higher prices will have to come from higher futures price levels and these gains can be captured, without storage costs or risks, using futures or options. To manage risks, consider selling cash grain and re-owing the grain on "paper" with futures or options to speculate on higher prices. If income tax management is a concern, consider contracting for January cash delivery or other deferred payment contracts to manage cash sales. The bottom line is that; right now, the market signals say, "storage will not be rewarded!"
Market analysts sometimes refer to markets as "supply driven or demand driven." What do these terms mean and what difference does it make? It usually refers to the focus of the market and how analysts expect the market to react to changes. In a supply driven" market, the primary focus is on supply and whether it will be too small or too large. Supply driven markets typically occur during the growing season. Concern about supply, during a poor growing season, may send prices sharply higher-prices move rapidly, causing a significant price change in a relatively short period of time. These market conditions typically cause prices to peak at or before harvest. Following the peak, they are often described as "having a long tail" because price usually begin a slow decline that may last for several months or years as producers react to higher prices and increase production. A "demand driven" market, producing higher prices, usually moves much slower. Low prices encourage new uses and increased use begins to "chew up" supplies. Continued heavy use slowly bids up prices as supplies begin to tighten. A demand driven market is less dramatic than a supply driven market and the uptrend may occur over a longer time period. Which type of market exists now? Corn, soybean and wheat markets responded to poor summer weather and production concerns, resulting in price action typical of supply driven markets. December corn futures prices rose 81cents from a spring $2.15 low to a $2.96 peak in early September. November soybean futures prices went from $4.35 to $5.93 during the same period-an increase of $1.58 per bushel. Chicago December wheat futures followed the same pattern from a $2.83 low to $4.40 resulting in a price increase of $1.57. The price peaks occurred in September, just as harvest was beginning, typical of a supply driven market pattern. While the price increases were significant, historically they are not especially high. Recent years of low prices have resulted in record demand and USDA projects that use will exceed this year's production and reduce carryover supplies. Will this strong use turn these markets into demand driven markets? Soybean use, aided by strong exports, has already produced up trending prices since the early October low in that market. This uptrend has continued in spite of peak of harvest deliveries and reports that the crop was "better-than-expected." These higher prices, in the face of negative supply news, suggest the soybean market focus may be shifting toward demand. The focus of the corn market, to this point, appears to have remained on supply. While the size of the crop was reduced, it should be adequate -especially with slow exports. However, World corn supplies are declining and some analysts believe USDA has underestimated demand. Improved exports and better than expected feed use could change the market focus, as use would bid up prices to ration dwindling supply. The lowest projected ending wheat stocks since 1973 could shift focus to demand, especially if exports are better than expected. Supply or demand driven markets? As harvest is completed, supply becomes known. Will adequate supplies allow prices to tail off," slowly declining into a big harvest next year? Or will strong demand slowly bid up prices in the coming months? At his point, while many speculate, no one really knows. Other unknowns that could add to market volatility are Southern Hemisphere production and the U.S. 2003 growing season. Flexibility and the ability to react to changing market conditions remain an important part of any risk management plan, regardless of whether the markets are supply or demand driven.
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