Grain supply fears abound

Grain supply fears abound

- Several countries report drought-related issues. - Incentives should drive additional acres. - Futures markets fairly range-bound of

MARKETS are ultimately determined by two factors: supply and demand.

Yes, myriad other factors and topics accelerate or suppress general tendencies in the marketplace, but at the end of the day, the amount of a commodity in the marketplace and how badly buyers want that commodity will provide a pretty solid foundational understanding of what's happening in the trade.

For several years, the grain and oilseed markets were essentially supply driven: Produce a bumper crop, prices drop; endure a historic drought, prices rise, and so on.

In recent years, however, seemingly unprecedented demand -- e.g., ethanol's influence in the corn market or China's appetite for soybeans -- switched the basic mindset to a demand-driven market.

Then, drought happened in a big way on a relatively global scale, and attention again turned to supply-side concerns. With the implications of a drought-stricken U.S. crop well understood at this point, questions of "demand destruction" started to pop up this summer. To date, however, those concerns seem fairly unfounded as demand for corn and soybeans has persisted even at fairly high price levels.

Two things appear to be happening that will set the stage for a wild ride in the markets in 2013: (1) continued global drought and (2) continued expansion of acres planted to corn and soybeans.

Starting with the latter, reports from a number of private analytical firms and government agencies indicate that producers are responding to market signals and gearing up to plant fencerow to fencerow this season. Those signals include:

* Russia could harvest 84.0 million metric tons of total grain next year, up from 70.5 mmt this year.

* Ukrainian farmers are likely to increase corn acreage 11% in 2013.

* Brazil's soybean acreage could climb 8.8% from last season as rains limit corn planting.

* U.S. farmers planted record corn acres in 2012, and with corn prices near $8/bu., history could repeat itself.

Indeed, the market, at this point in the "acreage battle," is telling producers to plant plenty of corn and soybeans (and wheat, too) because stocks-to-use ratios are extremely tight.

Handicapping expectations for this week's "World Agricultural Supply & Demand Estimates" from the U.S. Department of Agriculture, analysts largely predicted somewhat larger corn and wheat inventories but smaller soybean stocks as demand holds (Table 1).

Globally, however, traders anticipate world corn, wheat and soybeans inventories to shrink based, at least in part, on poorer harvests in the Northern Hemisphere (Table 2).

Supply concerns aren't expected to dissipate anytime soon, it seems, as analysts project smaller ending stocks for corn, wheat and soybeans. Country-by-country data seem to be backing up those concerns.

Wheat, in particular, may be on tap for a roller-coaster ride. Australia's Bureau of Agricultural & Resource Economics & Sciences, in its December crop report, suggested that winter wheat production will drop 26% from last year's record harvest. While still 14% higher than average for the five years prior to 2011, total winter crop production -- including barley and canola -- in Australia still will be off by 23% from last season. Lower seasonal rainfall was the key culprit cited in the bureau's forecast.

While Canadian wheat farmers produced an additional 7.6% this year than last, U.S. winter wheat is on track for a poor showing this year (Feedstuffs, Dec. 3).

USDA meteorologist Brad Rippey noted last week that since the 1950s, winter wheat abandonment has been at or above 25% in only two years: 1988-89, at 25%, and 2001-02, at 29% abandonment.

In both cases, winter wheat crop conditions going into dormancy were actually better than the record-poorest conditions observed in the final USDA "Crop Progress" report of 2012, which rated 26% of the crop in poor to very poor condition. Drought was a factor in both cases of record abandonment.

Wheat production may have expanded in Canada this year, but barley and canola production dwindled, according to the latest data from Statistics Canada. Despite record harvested area, canola production dropped some 8.9%.

Also, with weather trends not appearing to change anytime soon, Iowa State University climatologist Elwynn Taylor last week suggested that the U.S. will see a fourth year of below-trend corn yields. While not as bad as this year's predicted 122.3 bu. per acre, Taylor projected 2013 corn yields of only 147 bu. per acre.

"Our short-term trend is decreasing, and I do not see a change in the trend within the next five years," Taylor told Reuters last week, noting that the effects of the 2012 drought may ease but likely will not be erased anytime soon.

 

Market recap

Export sales for corn and wheat continued to disappoint last week, although corn has remained more or less supported despite lagging sales. Market uncertainty has kept corn futures range-bound in a 60-cent holding pattern since mid-September, according to Farm Futures analyst Paul Burgener.

Very little fundamental news has taken hold in the corn market in recent days, allowing contracts to shift slightly hither and yon. Prices ticked up for a few days early in the week, but those gains were essentially given back last Thursday on renewed export concerns.

Wheat was a similar story: Fundamental news should be very supportive to trade, and it was early in the week. Export disappointment last Thursday, however, led prices only modestly higher. Kansas City, Mo., and Chicago, Ill., contracts inched closer to $9/bu.; traders are hopeful that prices won't discourage international buyers who are increasingly running out of other sources to fulfill their wheat needs.

Soybean demand soldiered on more or less unabated. Strong export news, driven by China's seemingly insatiable demand for U.S. soybeans, has underpinned the market in a big way. While technical factors had pressured prices in prior months, soybeans finally cracked resistance at the 200-day moving average and pushed toward the next resistance level at $15/bu.

Still overhanging the markets somewhat is the ongoing concern over what will happen in Europe. The European Central Bank held interest rates steady at its meeting last week, and the euro lost ground to both the U.S. dollar and Japan's yen. Watching the dollar will become increasingly important in determining the relative success of U.S. soybean exports in the long haul.

 

Ingredient watch

For the most part, ingredient prices held steady over the past week. Corn bids were almost identical to week-ago levels, but soybean prices rose along with the futures markets. Linseed meal prices also picked up last week, gaining $40 per ton in Minneapolis, Minn.

Meat and bone meal, on the other hand, continued to falter.

"More of the same," reported one renderer in Memphis, Tenn. "It's like trying to stuff 10 gal. in a 5 gal. bucket."

Supplies were basically steady, and demand continued to fall short of what is needed to sop up that supply. With meat and bone meal prices more than $100 less than soybean meal prices, the problem is not a formulation issue but an issue of simply getting buyers to start including meat and bone meal in rations.

"We need to see the big boys like Tyson and Pilgrim's (Pride) putting in more (meat and bone meal) to move the needle," one source reported.

Prices for poultry and feather meals were essentially sideways last week but are likely to start increasing in coming weeks in response to the sharp run-up in fish meal prices late last month. Grease markets, likewise, were steady last week.

 

 

1. U.S. season-ending inventory forecasts, million bu.

 

Avg.

 

Nov.

2012,

estimate

Range

USDA est.

USDA

Corn

659

493-752

647

988

Wheat

706

612-754

704

743

Soybeans

130

63-145

140

169

Soybean oil (billion lb.)

1.397

1.200-1.580

1.520

2.540

Source: Bloomberg News.

 

2. Global ending stocks estimates, mmt

 

Avg.

 

Previous

estimate

Range

USDA est.

Corn

117.64

114.00-125.10

117.99

Soybeans

59.34

56.70-60.70

60.02

Wheat

173.61

172.00-176.00

174.18

 

 

Volume:84 Issue:51

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