Mid-year commodity outlook

by Ron Sterk
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Despite the cool, wet spring that delayed planting of spring wheat and fall row crops in parts of the United States and Canada and likely trimmed yield potential, as midyear approaches forecasts for most agricultural commodities call for lower average prices in 2013-14 in anticipation of increased supplies as production rebounds from the 2012 drought, even if current values still are mostly above last year’s “pre-drought” levels.

The June 12 World Agricultural Supply and Demand Estimates from the U.S. Department of Agriculture weighed on corn, soybean and wheat markets by projecting larger-than-expected carryover stocks of all three crops in 2014. Some corn, soybean and wheat futures fell by double digits the day of the report. At the same time, average cash price ranges projected by the U.S.D.A. were raised slightly from May for all three commodities (as well as other grains), although 2013-14 values still were well below average prices for 2012-13.

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Nearby futures prices for corn, soybeans and wheat (Chicago, Kansas City and Minneapolis) as of June 7 were up 7% to 12% from the same time a year earlier, although all were down from last summer’s highs and all but soybeans were down from the same week in 2011.

At the same time basis levels, and consequently cash prices for all three commodities, remain historically strong in many cases, reflecting last year’s smaller crops and tight old crop supplies in the case of corn and soybeans and uncertainty about the 2013 crop in the case of wheat.

New crop futures prices in early June, meanwhile, reflect 2013 production ideas, with December 2013 corn futures about $1 a bu below the July contract, and November 2013 soybean futures about $2 a bu below the July, while forward wheat futures are mostly above nearby July levels, again reflecting uncertainty and a forecast smaller wheat crop from 2012.

Corn, soybeans and wheat

Corn, the major row crop in the United States in terms of acres planted and bushels produced, and usually the most profitable for farmers, tends to lead other crops that must adjust in price to “fight” for acres that may be switched to corn if prices don’t stay competitive.

In its June 12 WASDE the U.S.D.A. projected a record large corn crop of 14,005 million bus in 2013, down 1% from its initial projection in May but up 30% from 2012 and, if realized, more than 900 million bus, or 7%, above the previous record large crop of 13,092 million bus in 2009. Carryover stocks of corn were projected at 1,949 million bus on Sept. 1, 2014, the start of a new marketing year, 2½ times the amount forecast for Sept. 1, 2013. Consequently, the U.S.D.A. expects average prices paid to farmers for corn to range from $4.40@5.20 a bu in the 2013-14 marketing year, down about 30% from $6.75@7.15 forecast for this year and down about 23% from $6.22 in 2011-12.

A similar scenario is expected with soybeans, with the U.S.D.A. projecting a record large crop of 3,390 million bus in 2013, up 12% from 2012 and about 1% above the current record of 3,359 million bus in 2009. The carryover on Sept. 1, 2014, was projected at 265 million bus, more than twice the forecast level on Sept. 1, 2013. The average price was projected to range from $9.75@11.75 a bu, down about 25% from the 2012-13 average forecast at $14.35 and about 14% below $12.50 in 2011-12.

Wheat is a bit different, having started its 2013-14 marketing year June 1, 2013. A price direction similar to that of corn and soybeans is expected, even if the 2013 U.S. crop, projected at 2,080 million bus, may be down 8% from 2012, and June 1, 2014, carryover, projected at 659 million bus, may be down 12% from 2013. Wheat prices are expected to be held in check by a near record large world wheat crop, which may limit export potential, and the larger U.S. corn crop, which

may restrict feed demand. Average cash wheat prices were projected to range from $6.25@7.55 a bu in 2013-14, down about 12% from a record high $7.80 in 2012-13 and down about 5% from $7.24 in 2011-12.

A similar scenario was seen in the WASDE for grain sorghum, oats, barley, rice and soybean meal, with 2013-14 forecast production up in most cases and average prices up slightly from May but mostly below year-earlier values.
Sorghum production in 2013 was projected at 425 million bus, up 72% from the drought-reduced crop of 2012 and nearly double 2011 production of 214 million bus, which was hit by drought in the Southwest. Prices were projected to average $4@4.80 a bu, down about 35% from $6.70@7.10 this year and down more than 25% from $5.99 in 2011-12.

Oats production, which rebounded last year from a record low 54 million bus in 2011, was projected at 73 million bus in 2013, up 14% from 64 million bus in 2012. The average price was projected to range from $2.80@3.40 a bu, up 10c from May but down about 20% from $3.85 in 2012-13 and about 10% from $3.49 in 2011-12. Oats futures prices, which tend to follow corn, have charted their own course higher recently, with nearby July trading above $4 a bu in early June, up more than 30% from a year ago.

Barley output in 2013 was projected at 220 million bus, unchanged from 2012 but up more than 40% from 2011. Prices were projected to average between $5.35@6.35 a bu in 2013-14, down from $6.40 in 2012-13 but above $5.35 in 2011-12.

Rice production was projected at 189.5 million cwts in 2013, down 5% from 2012, while prices were projected to average between $14.50@15.50 a cwt, compared with $14.80@15 in 2012-13 and $14.50 in 2011-12. Nearby rice futures prices have been strong, recently trading around $15.85 a cwt, up more than 10% from a year ago and up 5% above two years ago. Global rice production was forecast at a record high 479 million tonnes in 2013-14.

Production of soybean meal, the key protein ingredient in most livestock and poultry rations, was projected at 40.2 million tons in 2013-14, up 2% from the current year but down 2% from 2011-12. The average price was projected to range from $290@330 a ton, down sharply from $450 forecast for 2012-13 and from $394 in 2011-12.

The exception to the increasing production trend was soybean oil with output seen at 19,495,000 lbs in 2013-14, down slightly from 19,590,000 lbs forecast for this year. The average price was expected to range between 47@51c a lb, about even with 48.5c this year but below 51.9c in 2011-12.

The U.S.D.A. report also indicated an increasing surplus of 2012-13 sugar and potentially record 2013-14 sugar stocks, while cash prices for bulk refined sugar hover near five-year lows. Domestic 2013-14 sugar production was forecast to decline 431,000 short tons, raw value, or about 5%, from the current year. But a projected 344,000-ton increase in imports of sugar from Mexico, along with higher beginning stocks and tariff rate quota imports, are expected to boost carryover on Oct. 1, 2014, to a record 2,680,000 tons, up 20% from the 2013 forecast. Traders expect a combination of forfeitures to government loan programs and U.S.D.A. intervention to remove some surplus sugar from the market, both this summer, will prevent stocks from actually reaching the 2014 projection.

Bulk refined beet sugar currently is trading around 27c a lb f.o.b. Midwest, about 40% below the year-ago level and down more than 50% from 2011 highs. Trading for 2013-14 and 2014-15 has been 2@4c above nearby levels. Nearby domestic raw sugar futures prices fell to an all-time low on June 7 (but since have pulled higher) and have been trading below forfeiture levels, while world raw futures in New York have been trading near three-year lows.

Cocoa, eggs and dairy

Prices for other ingredients, such as cocoa powder, eggs and dairy also have shown mixed moves in recent months.

Cocoa powder has seen price declines at least as dramatic as those of sugar. Currently trading around $1.10 a lb, prices for 10% to 12% natural butterfat powder are down 42% from a year ago and 55% from two years ago. A combination of ample cocoa bean supplies, substitution when prices were at their highest in 2011 and reduced chocolate and cocoa demand related to weak economies, especially in Europe, contributed to the sharp decline and has provide significant buying opportunities in recent months.

Overall, lower prices for corn and soybean meal should help improve profit margins for egg and milk producers, as well as for livestock feeders in general.

Total egg production in 2014 was projected by the U.S.D.A. at 8,015 million dozen, up 2% from 7,879 million dozen in 2013, which also is expected up about 2% from 2012. Grade A Large eggs in New York are forecast to average $1.16@1.20 a dozen in 2013, about even with $1.174 in 2012 but above the 2014 projection of $1.07@1.16. Prices for breaking stock eggs and egg products in early June were above year-earlier values, although most were down from January 2013 with the exception of whites, which have experienced phenomenal demand and price strength due to whites-only breakfast offerings at some casual dining and fast food restaurants, including McDonald’s Corp., in early 2013.

Milk producers have seen possibly the greatest impact on margins because of the 2012 drought, with alfalfa prices soaring along with corn and soybean meal last year. Dairy cow slaughter in 2012 was the second highest in history as producers culled the lowest-producing cows. Still, milk production has continued to increase annually despite the drought, topping 200 billion lbs in 2012 and expected to increase about 1% in both 2013 and 2014. Prices for all types of milk averaged $18.53 a cwt in 2012, and were forecast by the U.S.D.A. to increase about 8% in 2013 before easing modestly in 2014.

Prices for dry dairy products in early June were mostly above year-earlier levels, while butter prices were lower due to ample production and stocks.

It should be noted that at this time in 2012, there was little if any hint of a severe drought across much of the Midwest and the outlook was for a record large corn crop of 14,790 million bus and 2012-13 average prices in the $4.20@5 a bu range. Instead, corn prices soared to record highs above $8 a bu (nearby futures contract) by August and production plunged to a 6-year low for the year. Soybean and wheat prices followed corn higher, even if production was much less affected than that of corn. Analysts and meteorologists agree that this year’s crops aren’t guaranteed yet, and most expect reduced plantings and excessive moisture to reduce yield and production levels from the U.S.D.A.’s June projections, especially for corn and soybeans. While 2013 hasn’t been without its weather “bumps” for the season to date, until further notice, the old adage “rain makes grain” still holds, certainly relative to a year ago.

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