Grain markets roundtable

by Ron Sterk and Laura Lloyd
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KANSAS CITY — Larger-than-expected March 1 stocks of corn, wheat and soybeans significantly pressured grain and oilseed futures prices after the U.S. Department of Agriculture released its quarterly Grain Stocks and annual Prospective Plantings reports on March 28. While most plantings numbers came in near the average of pre-report trade expectations, all of the stocks numbers, and especially corn, caught the trade by surprise. About two weeks later, those stocks numbers influenced the April 10 World Agricultural Supply and Demand Estimates in the form of revised carryover and use forecasts, although the more surprising numbers then were seen in the world numbers from the U.S.D.A., which also were mostly bearish.

“The U.S.D.A. stocks report was bearish and the biggest market miss ever,” Steve Freed, vice-president of research, ADM Investor Services, Inc., said.

By the market close on Monday, April 1, nearby May corn futures had plunged 93c a bu, or about 13%, in the two trading sessions since the report, to a nine-month low of $6.42¼ a bu. In the same two sessions, nearby wheat futures tumbled about 70c a bu in Chicago, more than 60c in Kansas City and about 48c in Minneapolis, while nearby soybean futures fell about 60c a bu. Amid some wide daily price swings, grain and soybean futures had recovered some of their losses from the Grain Stocks surprises by late last week, with wheat contracts seeing the best recovery. Where prices go from there was open to debate.

While corn continues to lead the grain and soy complex markets overall, since late March, wheat has been awash in market-moving news and rumors including large sales to China, improved export demand overall, ongoing drought, lingering cold, excess moisture and, of course, spring weather, which, like last year and most years, will be a key unknown factor.

Despite the varied market influences, most but not all analysts expected lower prices in the months ahead as values continue to decline from last summer’s highs, mostly the result of larger-than-expected stocks and anticipation of large new crop supplies, although tight old crop supplies of corn and soybeans will support prices nearby. Of course, it all depends on improved or more “normal” weather.

Drew Lerner, president at World Weather, Inc., Overland Park, Kas., said the eastern Corn Belt and states as far west as Missouri and Iowa should return to more normal conditions, the Delta appeared poised for more favorable weather conditions and only the High Plains wheat region was likely to remain overly dry.

Mr. Lerner characterized prospective 2013 weather patterns as a return to “quasi-normal conditions.”

This year and last year seemingly couldn’t be more different. The 2012 season was characterized by two major weather “events,” the warm early spring and the late drought. In contrast, early in the 2013 season, there appeared to be no single defining market feature but rather a conglomeration of varied domestic and global weather, supply and demand, and outside factors that add an unsettling tone to the markets.

Last year, historically early summer-like weather allowed a jumpstart to planting of spring wheat and row crops, but the real effects of weather were felt later in the summer as the worst drought in decades developed quickly and spread across the Midwest, devastating corn yields and reducing soybean production.

Unlike early last year, weather this year was playing a largely negative role as cold, wet conditions in many areas delay corn and spring wheat planting, freezing temperatures in late March and again last week continue to threaten the hard red winter wheat crop in western parts of the Southwest growing region, and excessive moisture was affecting some key soft red wheat areas.

“I surveyed freeze injury in southwest Oklahoma and the damage is extensive,” Jeff Edwards, Ph.D. and small grains extension specialist at Oklahoma State University, said in an e-mail and on his blog on April 6. “In my experience, most freeze events are overhyped; however, this one was the real deal. Most of these fields are too far past the tillering stage to have yield compensation from secondary tillers.”

Working in the crop’s favor this spring was late development of the hard red winter crop with jointing in some areas well behind average due to the same cold weather.

The damage Dr. Edwards observed occurred when temperatures across Oklahoma and surrounding areas fell into the teens and 20’s March 25-26. While the fields with the greatest yield potential likely were irrigated and further developed than much of the dry land wheat in the region, the damage remained a concern to the already drought-stressed hard red winter crop, especially after another freeze last week hit the same areas of western Kansas, eastern Colorado and parts of the panhandles of Texas and Oklahoma. Crop analysts again indicated damage had occurred, but said it would take a week or more to determine the extent.

“For hard red winter wheat, it’s too late; there’s no way to bail it out,” David Salmon, owner of Weather Derivatives, a Belton, Mo., agricultural and energy weather consulting service, said. “The hard red winter crop will be mediocre. There are just too many little problems and one big one – dryness in the southwestern sector.”

The U.S.D.A.’s first 18-state comprehensive winter wheat condition ratings as of March 31 indicated the crop rated 34% good to excellent, 36% fair and 30% poor to very poor, little changed from the historically low final rating for the season on Nov. 25, 2012, of 33% good to excellent, 41% fair and 26% poor to very poor and far worse than the first spring 2012 rating of 58% good to excellent, 30% fair and 12% poor to very poor. In the second update as of April 7, the overall winter wheat ratings improved slightly but remained well below the ratings on the same date for the previous year’s crop.

“The good to excellent ratings in early April were the lowest for the winter wheat crop since 2002,” Paul Meyers, chief agricultural economist at Foresight Commodity Services, Inc., said. “Hard red winter yields will be below average, but by how much is the question. The next eight weeks will be critical.”

There was a wide disparity between hard winter and soft winter wheat states. Without weighting the states for the amount of wheat grown, the average good to excellent rating on March 31 for the top seven soft winter wheat states was 62% compared with 21% for top seven hard winter states, with poor to very poor ratings averaging 7% for the soft winter states and 41% for the hard winter states.

How much impact the additional moisture has on the struggling hard red winter wheat crop remained to be seen, but there was little question soil moisture conditions improved recently. The U.S. Drought Monitor as of April 9 showed considerable contraction from just a week earlier in the area of exceptional drought (the most severe classification) that had covered most of Nebraska, although pockets of exceptional drought remained, and extreme drought persisted across the heart of the hard red winter wheat region, including most of Nebraska, large parts of South Dakota and Kansas, and sections of eastern Colorado, Oklahoma and Texas.

Wheat acreage up 1% from 2012

In its annual Prospective Plantings report released March 28, the U.S.D.A. forecast total planted wheat area for harvest in 2013 at 56.4 million acres, up 1% from 55.7 million seeded for harvest in 2012.

Winter wheat area seeded in 2012 for harvest in 2013 was estimated at 42 million acres, up 2% from 41.3 million acres last year and up slightly from the January estimate of 41.8 million acres. The winter wheat estimate includes 28.9 million acres of hard red (down from 29.1 million estimated in January), 9.67 million acres of soft red (up from 9.42 million) and 3.39 million acres of white wheat (up from 3.27 million).

Farmers intend to plant 1.75 million acres of durum in 2013, down 18% from 2.1 million last year, and 12.7 million acres of spring wheat other than durum, up 3% from 12.3 million in 2012. The forecast spring wheat area includes 12.1 million acres of hard red spring wheat.

The U.S.D.A. all-wheat planting number was near the average of trade expectations of 56.4 million acres, with the spring wheat other than durum number above the average trade estimate, durum well below the trade average and winter wheat above the trade forecast.

Mr. Meyers expected winter wheat production as well as the total 2013 wheat crop to be down 5% from last year when the outturn totaled 2,269 million bus.

While the U.S.D.A. will not issue a 2013 winter wheat production estimate until its May 10 Crop Production report, soft wheat millers at the North American Millers’ Association division meeting in Palm Coast, Fla., in March forecast soft red winter wheat production in 2013 at 492.3 million bus, up 17% from 419.8 million bus in 2012. If the forecast is realized, the 2013 crop would be the largest since 613.6 million bus in 2008. Crop forecast panelists indicated production would be up in all major regions. The millers also forecast soft white winter wheat production in 2013 at 225.4 million bus, up 8% from 208.3 million bus in 2012.

While U.S. wheat exports have lagged 2011-12, rumors during the past couple weeks of large sales of soft red winter wheat to China were at least partly confirmed on April 11, when the U.S.D.A. said China bought 360,000 tonnes of U.S. soft red for shipment in 2013-14. Trade sources were confident the total amount bought by China was much larger, in the area of 1 million bus or more, with additional reports forthcoming.

U.S. wheat stocks above expectations

Wheat stored in all positions on March 1 totaled 1,234 million bus, up 3% from 1,199 million bus on March 1, 2012, the U.S.D.A. said in its March 28 Grain Stocks report. Indicated disappearance of wheat during the December 2012-February 2013 period was 436 million bus, down 6% from the same period a year ago.

The U.S.D.A. all-wheat stocks number was well above pre-report trade estimates that averaged about 1,167 million bus.

Durum stocks on March 1 were 42.4 million bus, up 18% from 35.8 million bus a year ago. Indicated disappearance during the December-February period was 18.6 million bus, up 52% from a year earlier.

The U.S. wheat carryover on June 1, 2013, was projected at 731 million bus, up 2% from 716 million bus as the March projection due to a projected 15-million-bu decrease in 2012-13 feed and residual use more than offsetting a slight increase in seed use, the U.S.D.A. said in its April 10 World Agricultural Supply and Demand Estimates.

The U.S.D.A. 2013 wheat carryover was on target with the average estimate of the trade

Projected 2012-13 wheat supply, exports and domestic food use were unchanged from the March numbers.

Feed and residual use was projected at 360 million bus, down 15 million bus from 375 million bus projected in March but up 120% from 164 million bus in 2011-12.

Total use of wheat in 2012-13 was projected at 2,411 million bus, down 14 million bus from 2,425 million bus in March but up 180 million bus, or 8%, from 2,231 million bus last year.

“We have enough wheat to transition from old crop to new crop,” Mr. Meyers said, calling U.S. carryover stocks above 700 million bus “fairly comfortable.” But he added he thought the U.S.D.A.’s feed and residual number still was about 35 million bus too high.

The average price of wheat paid to farmers in 2012-13 was projected at $7.70@7.90 a bu by the U.S.D.A compared with $7.65@7.95 a bu as the March forecast but well above $7.24 a bu in 2011-12.

Mr. Meyers said he sees Kansas City September wheat futures prices trading in the $6.25@6.65-a-bu range during the summer, down considerably from around $7.55 last week. Prices in Chicago will be about 40c a bu below the K.C. price, and prices in Minneapolis about 40c above the K.C. price, he said. Pressure will come from a combination of lower corn prices as corn production recovers, larger world wheat supplies and less export demand, he said.

“Prices should trend lower if weather is okay,” Mr. Freed said, forecasting year-end wheat prices in Chicago around $5.50 a bu.

While the U.S. wheat carryover was near expectations, the U.S.D.A.’s world wheat forecast was a surprise. World wheat ending stocks for 2012-13 were projected at 182.26 million tonnes, up 4 million tonnes from 178.23 million tonnes as projected in March but down 9% from 199.38 million tonnes in 2011-12, the U.S.D.A. said.

The trade will closely watch for delays in plating the spring wheat and durum crops in both the Upper Midwest and Canada, as well as weather concerns across Europe, Russia and Ukraine.

Corn sets tone for grains, oilseeds

Corn remained the leader in the grain and oilseed markets, both in forecast acres planted and in market impact. It was the vastly larger-than-expected March 1 corn stocks estimate of 5,399 million bus that drove corn futures prices to nine-month lows and soybean futures to 10-month lows the week following the March 28 release of the March 1 Grain Stocks report. Though down 10% from March 1, 2012, the U.S.D.A. corn number was above the entire range of analysts’ pre-report forecasts and 7% above the average of those forecasts.

“The difference between the U.S.D.A.’s March 2013 (corn) stocks estimate . . . and the average trade guess was about 370 million bus, one of the largest differences in the past 30 years,” Darrel Good, a University of Illinois agricultural economist, said in his Weekly Outlook after the report.

Some surmised that actual 2012 corn production may have been larger than the U.S.D.A.’s January estimate of 10,780 million bus. But the cause for the miss was most likely related to overly-optimistic use estimates, which high prices clearly affected, and indirectly to difficulty in measuring on-farm storage of corn. The corn use picture was muddled even more because of increased feeding of wheat this year, but the March 1 wheat stocks number also was well above expectations. The U.S.D.A. said estimated corn use during the December 2012-February 2013 period was 2.63 billion bus, down 27%, or almost 1 billion bus, from the same period a year earlier.

“Market participants form expectations for the quarterly stocks estimates based on the level of stocks at the beginning of the quarter and a projection of use during the quarter,” Mr. Good said. “Exports and domestic processing uses of corn during the quarter can be projected fairly closely. Surprises in the U.S.D.A. estimates, then, mean that feed and residual use during the quarter deviated from market expectations.

“The implied rate of feed and residual use of corn in the first half, and particularly in the second quarter, of the 2012-13 marketing year is quite low,” Mr. Good said. “The slow rate . . . does not seem consistent with livestock numbers, a sharp reduction in the production of distillers’ grains and the implied negative feed and residual use of wheat during the same six month period.”

Dan Basse, market research manager at AgResource Consulting Group, Chicago, agreed that the U.S.D.A.’s feed use numbers appeared low, saying he saw “no evidence” of less feed demand. He saw tight old crop supplies as supportive to prices and suggested old crop corn prices had bottomed, in part because of improved demand from the ethanol sector.

In its March 28 Prospective Plantings report, the U.S.D.A. said farmers indicated they intend to plant 97.3 million acres of corn in 2013, up slightly from 97.2 million acres in 2012 and near trade expectations that averaged 97.3 million acres.

“If realized, this will represent the highest planted acreage in the United States since 1936, when an estimated 102 million acres were planted,” the U.S.D.A. said. “Expected returns for corn are again historically high going into 2013.”

Of course, weather will determine if that many acres actually get planted, and what yields will be on the acres that are planted.

“Corn will be better than last year at 90% confidence,” Mr. Salmon said. “Dryness that might grow back to a future drought is all but eliminated from the Midwest, but is still hanging around the Plains and could yet make intrusions sufficient to support hot days, and the newest worries, hot nights, that will take the edge of yields.”

Mr. Meyers expected the U.S.D.A. will trim forecast yields slightly due to the late start to planting, but that yields still will average around 160 bus an acre, and with the large planted area, will result in a record-large crop of around 14.5 billion bus. As a result, he said December corn futures prices may fall below $4 a bu, although trading will be “choppy getting there.”

The U.S. corn carryover on Sept. 1, 2013, was projected at 757 million bus, up 20% from 632 million bus projected in March but down 23% from 989 million bus in 2012, the U.S.D.A. said in its April 10 WASDE.

The U.S.D.A. 2013 corn carryover number was well below the average of trade expectations of 824 million bus.

Feed and residual use was projected at 4,400 million bus, down 150 million bus, or 3%, from 4,550 million bus as projected in March and down 145 million bus from 4,545 million bus in 2011-12. Food, seed and industrial use was projected at 5,937 million bus, up 50 million bus from 5,887 million bus as forecast in March due to a 50-million-bu increase in projected use of corn for ethanol and by-products at 4,550 million bus. Projected use of corn for food and seed was unchanged at 1,387 million bus.

Mr. Meyers said he was surprised the U.S.D.A. didn’t reduce the feed and residual number more, which would put 2013 corn carryover closer to 1 billion bus.

U.S. corn exports in 2012-13 were projected at 800 million bus, down 3% from 825 million bus in March and down 48% from 1,543 million bus in 2011-12.

The average farm price of corn was projected to range from $6.65 to $7.15 a bu in 2012-13, down from $6.75@7.45 as projected in March but still above $6.22 a bu in 2011-12 and $5.18 a bu in 2010-11.

Soybean demand remains strong

The U.S.D.A.’s March 1 soybean stocks estimate of 999 million bus, which was down 27% from 2012, still came in well above trade expectations. But it took a backseat to the corn and wheat numbers. Also somewhat of a surprise to the trade was the U.S.D.A.’s estimated Sep. 1, 2013, soybean carryover of 125 million bus, which was below trade expectations.

As soybean planting season approached, temperatures and precipitation looked very different from last spring, leading market analysts to predict a return to trend line yields and the possibility of production of more than 3 billion bus against a backdrop of continuing strong export demand. Yet, despite hopes for a return to more normal growing conditions and prospects for larger carryover in 2013, experts believe nearly “maxed-out” domestic acreage and a continuing strong export market will keep soybean prices in double digits.

“Exports are going to stay strong in China. The population has grown used to eating chicken and pork and they are not going to turn back,” Jack Scoville, vice-president, Price Future Group in Chicago, said.

While 2012 was characterized by warm temperatures, early planting and the devastation of a 50-year drought, the approach of the 2013 soybean planting season in early May featured cooler-than-normal temperatures and a more typical pattern of precipitation. Visions of persistent multi-year drought were giving way to ideas that the extreme 2012 dryness may have been a single-year event.

“Last year is a done, dead deal,” Rich Nelson, chief strategist at Allendale, Inc., in McHenry, Ill., said

Despite current optimism that the 2013 growing season will be accompanied by a favorable weather scenario and a big crop, market observers predicted soybean futures prices will stay relatively firm because of a tight relationship between supply and demand.

“Soybean prices are not going to collapse,” Mr. Nelson said. “We can meet soybean demand but not exceed it.”

Mr. Scoville said he sees July soybean futures falling to about $12.50 a bu, about 9% below recent levels. He added that, if the spread between old crop and new crop soybean futures remains about the same, soybean prices may retreat to about $11 a bu, a level last seen in December of 2011.

The U.S.D.A. in its Prospective Plantings report forecast soybean-planted area for 2013 at 77.1 million acres, down slightly from 2012 but the fourth-largest on record, if realized.

Chad Hart, extension economist at Iowa State University, said he expects the Brazilian soybean crop this spring to be record large and exceed the U.S. crop. The April 10 WASDE estimated 2012 U.S. soybean production at 82.06 million tonnes, below Brazil’s projected 2012-13 production of 83.5 million tonnes.

Mr. Hart said Brazil will surpass the United States in soybean outturn on an ongoing basis because Brazil has been bringing more and more land into soybean production, while the United States has already attained near maximum production in terms of acres. He called 75 million to 80 million acres “a sweet spot” for U.S. soybean area with little opportunity to meaningfully expand, even if the current cold spring leads to corn planting delays and decisions by some farmers to switch to later-planted soybeans.

While grain markets in 2012 were dominated mostly by the Midwest drought, 2013 is shaping up to be a year where markets are affected by a conglomeration of events that are forecast to ultimately lead to larger supplies but lower prices for corn, wheat and soybeans in 2013-14. Of course weather is the primary player and doesn’t always “cooperate” to produce the results expected by market analysts, as was clearly seen last year when no one in April was calling for a devastating drought.

“Now it’s all about the weather,” Mr. Meyers said.

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