WITH some minor episodes of profit-taking aside, the grain markets last week summarily deemed the U.S. Department of Agriculture's Jan. 11 crop reports a bullish affair.
With the year's first major crop data well in hand, the market now has a clearer view of the fundamentals of the grain and oilseed complex, and the big picture hasn't changed much.
Supplies of soybeans, corn and wheat are extremely tight (and roughly in that order of scarcity), demand continues more or less unabated and Brazil and China are still the two biggest players to watch for the foreseeable future.
Starting with the balance sheet, it is fairly clear that old-crop prices will remain relatively strong. While the U.S. corn crop was pegged to be 55 million bu. larger than the previous USDA forecast, the estimate of Dec. 1, 2012, stocks was much smaller than the average trader had estimated, hitting a nine-year low of 8.03 billion bu.
University of Illinois economist Darrel Good, in his analysis of the USDA data, said the stocks estimate "implies that feed and residual use of corn has not slowed as a result of the small crop and high prices that began in June of last year."
In fact, Good said feed usage of corn in the latter half of 2012 appeared to be 110 million bu. larger than usage in the second half of 2011, which was surprising given that wheat feeding was up roughly 125 million bu. during the same period.
"Unlike other years of small production and high corn prices, feed use of corn has remained large," Good wrote. "Such a high rate of use has been possible because corn used for ethanol production has declined about 10% year over year and because exports have been almost nonexistent."
For the first quarter of the marketing year, corn exports hit a 41-year low of 220 million bu., leading USDA to set its export projection at a 43-year low of 950 million bu.
Even so, U.S. corn ending stocks were projected to be even smaller than anticipated due to the unabated rate of domestic feeding. Projected ending stocks of 602 million bu. would be a 17-year low, and the marketing year average farm price of $6.80-8.00/bu. would be a record high.
For soybeans, USDA estimated crop production to be 44 million bu. more than its December forecast, but quarterly stocks of 1.966 billion bu. were still at a nine-year low.
Good noted that the stocks figure implied a larger-than-average residual disappearance during the first quarter of the marketing year, while an unchanged USDA export estimate indicated the expectation for a record South American soybean crop and the need for a larger domestic crush to meet growing demand for soybean meal and oil.
Crush demand has not slacked much at all, according to the latest data from the National Oilseed Processors Assn. (NOPA). In its monthly crush report, NOPA said December's soybean crush tallied 159.899 million bu., and while that was toward the lower end of traders' expectations, it still marked a significant jump from the 145.4 million bu. crushed in December 2011.
Exports have been an integral part of the success of U.S. crop production over the past decade or so, but prices over the past six months have put domestic feed and crush usage back in the driver's seat, to some extent.
Relative to exports, USDA's Economic Research Service (ERS) noted last month that one of the primary drivers of U.S. agricultural export growth over the past decade has been the stark depreciation in the value of the U.S. dollar. Since 2001, the dollar has experienced the most prolonged period of depreciation against the currencies of other agricultural trading partners since 1970.
ERS noted that while the dollar many not continue to depreciate, the real dollar exchange rate will likely remain relatively low, continuing to support potential export competitiveness. That competitiveness, however, has not been enough to keep Brazil from surpassing the U.S. as the world's leading exporter of soybeans and soybean products.
With its production climbing dramatically, Brazil accounted for roughly 32% of global trade in soybeans and products by 2011. Over the next decade, ERS estimated that Brazilian soybean acreage will increase, on average, by some 2% per year.
While attention paid to South American production may not be quite as "en vogue" as it was a decade ago, it is clear that Brazil's still-developing agriculture sector remains a critical X-factor to watch in the marketplace.
With the January USDA reports out of the way, traders have returned to watching South American production prospects for a fundamental market direction.
Last week, Celeres, an analytical firm in Brazil, raised its forecast for Brazilian soybean production to a record 80.43 million metric tons based on plantings of 27.5 million hectares, a 9.5% expansion from last year.
Celeres' estimate is far more conservative than the Brazilian government's estimate of 82.7 mmt and USDA's Jan. 11 projection of 82.5 mmt. Celeres said farmers in Brazil are taking advantage of strong prices, with 56% of the soybean crop already sold, compared to just 48% at this point last season.
German analytical firm Oil World, meanwhile, upped its estimate for Brazil's beans to 81.0 mmt and said the crop potentially could be larger if favorable weather conditions prevail through the completion of harvest.
With U.S. stocks spandex tight, the market is counting on the South American crop to fulfill the needs of the market as current supplies dwindle.
For corn prices, USDA's January report sparked a surge higher.
"Corn prices rallied through the January report, with tightening supplies and an increase in feed use," Farm Futures analyst Paul Burgener noted. "With lower supplies (projected) in the report, there should still be opportunities to make old-crop sales in the $7.50/bu. range into the spring and early summer. Trouble in the South American crop could move prices even higher."
After a brief profit-taking respite last Thursday, corn prices started moving higher again Friday into mid-session.
As Good had noted, front-month contracts of both corn and soybeans were supported, although deferred issues could find some pressure in the coming weeks.
"However, soybean exports and crush remain ahead of the pace necessary to meet USDA projections, forcing the market to ration demand at some point this spring," Burgener argued. "Current prices will likely not do that, so higher prices are going to come in the spring."
He noted that prices could approach $15/bu. later in the year as soybean supplies get tighter and tighter.
China's soybean imports remain a focus of the markets, with the country buying an additional 360,000 metric tons of U.S. old-crop soybeans last week. Traders may be more concerned with corn exports, however, which have been pretty well dried up by high prices.
Over the past three years, China has become a major corn importer (Figure), increasing purchases from 60 million bu. in 2009-10 to 210.5 million bu. in 2011-12 -- an increase of 250% in three marketing years. China's official forecast suggests that corn imports will fall 54% this year; however, since a drought-driven price surge caused a halt in purchases from the U.S., China is expected to delay new purchases of corn until at least April based on the country's typical buying strategy.
Ingredient prices continued to firm last week as corn and soybean prices helped boost both substitutes and complements and as a seasonal lull in slaughter plumped animal-derived products on shorter supplies.
Renderers viewed 2-3% slower slaughter rates as an opportunity to move a backlog of meat and bone meal products.
Last week's announcement that Cargill would idle its Plainview, Texas, beef plant could also wipe out a significant supply of ruminant protein products from the Southwest, meaning that prices there could further appreciate following the Feb. 1 shutdown.
Export opportunities have continued to grow in recent weeks, with new buyers emerging in non-traditional countries such as Nepal, Turkey and Nigeria. Those new destinations have provided some support to prices in the eastern U.S.
Pet food-grade products continued to firm through mid-January, and the appreciation in fish meal prices helped firm up prices for both poultry and feather meals.