Market eagerly awaiting December reports

Market eagerly awaiting December reports

Traders consider possibility that robust exports and ethanol demand could lead USDA to revise its estimates of 2013-14 ending stocks.

TRADERS have been a little wary of getting overly aggressive in the grain markets in the early days of December as the post-Thanksgiving lull yielded to expectations heading into the U.S. Department of Agriculture's December supply and demand reports.

The market isn't expecting major changes to U.S. corn and soybean production estimates in the reports, but some are anticipating adjustments in the balance sheet for the two crops as feed, ethanol and export demand appear to have been pretty stellar thus far in the 2013-14 marketing year.

Expectations heading into the Dec. 10 reports' release, in fact, are almost the opposite of what they were at this time a year ago.

Going into the Dec. 11, 2012, reports, traders largely expected USDA to trim export demand for corn, offering a solid boost to extremely tight ending stocks. This year, it's entirely plausible that USDA could increase its export forecast as sales and shipments are both moving ahead of the pace needed to fulfill the current estimate.

However, export sales slacked off a bit last week, stemming some of the bullishness in the market relative to the December balance sheet.

"The agency is expected to make only modest adjustments to its carryout forecast, with no update of production estimates here in the U.S. until January," Farm Futures senior editor Bryce Knorr said last Friday. He noted that last week's disappointing exports may have thrown cold water on prior expectations, but export news was on traders' minds for another reason, as well.

"Traders are still waiting for clarification from China on approval of the (genetically modified) variety that caused three shipments to be rejected in recent weeks," he explained.

China hasn't said much about that situation, but there is some amount of concern among traders that China could use the situation to back off on its otherwise strong purchases of U.S. corn.

China's imports of U.S. products are a big deal, to put it mildly. Export sales commitments to China have driven the soybean market as of late, leading USDA to boost its forecast for soybean exports last month by 39.5 million metric tons.

Robust early-season sales tallied 32.2 mmt as of Oct. 31, a record high for that date, and sales to China were the big reason for the strong performance. According to USDA, 71% of cumulative export inspections during the first two months of the marketing year were bound for China, and soybean sales commitments to China already make up 98% of all sales during the 2012-13 marketing year (Figure).

What happens in South America in the coming months will go a long way toward determining how U.S. exports will fare for the rest of the marketing year. Traders are expecting record Brazilian soybean production, with the average pre-report guess topping 88 mmt; Argentina is expected to produce more than 55 mmt.

If those big crops come to market without a hitch, it will mean increased competition for U.S. soybeans and lower prices to come despite an extremely tight U.S. soybean pipeline (Table 1). Global stocks of both wheat and soybeans are expected to be even larger than USDA's current estimate, in fact, leading traders to project a revision in the global balance sheet in the December report (Table 2).

 

Bigger crops, lower prices

Statistics Canada last week released its estimates of 2013-14 crop production, showing huge increases in wheat and canola production over last year, which further stiffens the competition for these key ingredients. Canola production is seen as nearly 30% larger than last year, with wheat production estimated to be nearly 38% larger.

Also, the U.N. Food & Agriculture Organization (FAO) last week estimated that world cereal production will reach a new record high of almost 2.5 billion mt, almost 8.4% larger than last year and 6.0% above the record set in 2011. The revised estimate reflects adjustments to projected corn output in the U.S., Russia and the Ukraine, which all saw solid harvests this season.

FAO projects wheat production to be up 7.8%, corn production up 12% and rice production up 1%. Accordingly, the organization pegged a 13.4% increase in global ending stocks for all cereals, with a stocks-to-use ratio of 23.5% — much better than the historical low of 18.4% set in the 2007-08 marketing year.

Naturally, these estimates point to one thing: lower prices for U.S. grains.

"Prices reflect that we have moved from an era of scarcity to one of adequate inventories, and prices have responded by moving lower," Ohio State University economist Matt Roberts said. "We are already seeing lower prices come into the market, and unless U.S. or South American acreage declines, those prices are likely to continue to move lower."

Roberts said the market is moving back toward a more normalized supply/demand balance following a return to trend-line yields in the U.S. in 2013.

"Prices will only return to profitable levels if supply declines due to acreage leaving primary row crops or demand returns," he said. "This will likely create a significant financial strain in crop-growing areas."

One question mark heading into the report this week is the amount of corn and soybeans USDA will earmark for feed and residual use. It is assumed that cheaper feed has led to some amount of herd and flock expansion, and heavier slaughter weights would indicate that producers are indeed feeding animals a little more aggressively this year than they were a year ago.

However, estimating this category is much more challenging than projecting export and ethanol usage. While USDA provides weekly data on the amount of corn and soybeans exported and the Energy Information Administration gives a weekly tally of corn used to produce ethanol, data on feed use is just not available in such a concrete format.

"Information relative to the consumption of corn as livestock feed is not available on a timely basis since no census or USDA survey data are collected in this category," University of Illinois economist Darrel Good said. "Instead, the USDA's quarterly estimate of corn stocks provides the basis for estimating feed and residual use of corn in the quarter prior to the reference date for the stocks estimate."

Good noted that over the past six years, the magnitude of feed and residual use of all grains per grain-consuming animal unit has varied by 20%, which USDA attributes to variation in crop size. The wide variation, of course, means it is very difficult for traders to guess how USDA might adjust this category on the balance sheet.

"The increased difficulty in anticipating the magnitude of quarterly feed and residual use of corn makes it difficult for the market to anticipate the USDA's quarterly corn stocks estimate," Good concluded. "That difficulty is compounded for the Dec. 1 report since that estimate also includes any change in the production estimate not anticipated by the market."

The December stocks report will be released during the second week in January. Good said that will mark the next opportunity for USDA to supply the grain markets with a major surprise.

 

Market eagerly awaiting December reports

1. 2013-14 U.S. crop ending stocks, million bu.

 

Avg.

 

USDA

2012-13

Dec.

 

est.

Range

Nov. est.

final

2012

Corn

1,871

1,737-2,013

1,887

824

647

Soybeans

153

118-170

170

141

130

Wheat

540

404-570

565

718

754

Sources: Reuters, USDA.

 

2. 2013-14 global crop ending stocks, mmt

 

Avg.

 

USDA

2012-13

Dec.

 

est.

Range

Nov. est.

final

2012

Corn

163.30

156.95-165.50

164.33

134.86

117.61

Soybeans

71.64

70.00-75.79

70.23

60.11

59.93

Wheat

179.11

176.30-182.20

178.48

175.59

176.95

Sources: Reuters, USDA.

 

Volume:85 Issue:50

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