WASDE just treading water?

ALL you really need to know about the Dec. 11 "World Agricultural Supply & Demand Estimates" (WASDE) report can be summed up in three short points:

1. The corn situation isn't as bearish as it looks.

2. The soybean situation is every bit as bullish as it looks.

3. The wheat market will probably get worse before it gets better.

Before the U.S. Department of Agriculture report was released, traders largely expected USDA to trim export demand for corn, offering a solid boost to extremely tight ending stocks.

That didn't happen, though, as USDA more or less punted, leaving its U.S. feed grain supply and use projections unchanged from the December report (Table 1) while lowering its corn price outlook slightly.

By leaving corn usage steady when the market summarily assumed that a reduction in exports was coming, USDA told the market one of two things: either USDA is treading water and the expected changes to the balance sheet are coming in January (which is what many in the trade now assume), or USDA is presuming that lower corn prices will stimulate export demand enough in the coming weeks to boost exports back to a more reasonable level.

As University of Illinois agricultural economist Darrel Good noted in a Dec. 10 analysis, corn prices are largely supported by two factors: production uncertainty and questions about whether the rate of consumption has slowed sufficiently.

Production uncertainty will be around for a while, with corn production in South America remaining a moving target until February, concerns persisting over wet conditions in Argentina and the possibility of a lingering U.S. drought further impinging on domestic production in 2013.

Questions of consumption, on the other hand, will become clearer after USDA's January WASDE and the December "Grain Stocks" reports, which will be released Jan. 11.

Good said the reports are expected to reveal a high rate of feed and residual use for corn during the first quarter of the marketing year and a smaller 2012 harvest than previously forecasted, meaning that stocks will be as tight -- or perhaps tighter -- than currently projected.

"There is a relatively high probability of large crops, increasing stocks and lower corn prices in the 2013-14 marketing year," Good concluded. "However, current tight supplies and production uncertainty are expected to keep prices relatively high in the early part of the new year."

USDA's soybean balance sheet reaffirmed that oilseed stocks are extremely tight, confirming the trade's pre-report guess that stocks would end up being 10 million bu. smaller than projected in November.

USDA boosted its soybean crush estimate by 10 million bu. to 1.570 billion due to strong foreign demand for soybean products.

Soybean oil exports were projected to be 1.8 billion lb., up sharply from 1.2 billion lb. last month on exceptionally strong November sales of more than 700 million lb. to markets like China and Mexico.

Soybean meal exports were also raised 300,000 tons to 8.2 million based on strong sales to the European Union, Egypt and several Asian markets, including the Philippines and South Korea.

Global stocks estimates for both corn and soybeans were tightened slightly (Table 2).

Production estimates were boosted for several countries, most notably an 8 million metric ton bump in China's corn production. For the most part, however, those increases were offset by smaller production estimates in other countries.

Export demand for U.S. soybeans has continued unabated, with sales week after week exceeding industry expectations and USDA projections for the pace needed to achieve marketing-year estimates.

That demand strength has pushed soybean prices back toward $15.00/bu., with upside potential existing beyond that mark should South American production falter at all in the coming months.

The wheat market took the biggest drubbing in USDA's report.

Lackluster exports in recent weeks have been well covered because the U.S. product is currently too pricey for global buyers. With prices continuing to slide in the wake of the December WASDE, the wheat market could get softer before it finds a bottom.

The stocks-to-use ratio for wheat "is the loosest at the moment, but there's a big story that we need to be covering," Bunge North America vice president Bailey Ragan told the National Grain & Feed Assn.'s Country Elevator Conference last week in Omaha, Neb. "A lot of the ag money that's out there are the funds wanting to get back in the markets. If you look at any of the carry situations, wheat's the only (commodity) with a carry."

Ragan explained that at recent prices, when nearby wheat traded at $8.50/bu., deferred prices were near $8.85.

"You look at anything else, and there's a big inverse, as with corn and beans," he said.

With that in mind, Ragan told attendees to anticipate firms looking at wheat because they can profitably buy the nearby month and roll positions forward.

Meanwhile, as prices drift lower in the short term, marketing conditions will improve for U.S. wheat on the global stage while overseas supplies dwindle as the marketing year progresses.

Market recap

Corn prices drifted lower throughout last week in a relatively narrow 20-cent trading range, while soybeans may have found a near-term bottom last Wednesday then moved steadily higher through the latter half of the week.

At mid-session trading last Friday, nearby corn prices traded near $7.13/bu. as little follow-through selling emerged after a neutral to somewhat bullish WASDE.

Farm Futures senior editor Bryce Knorr noted last Friday that the January WASDE is the next major milestone for the trade.

"Jan. 11 remains the market's key benchmark, but there's growing evidence to support the notion that a reduction in harvested acreage could be offset by weaker demand caused by price rationing," he said. "Tight stocks could still rally prices in late spring and early summer, especially if dry conditions persist in the western Corn Belt."

In other words, the corn market is still as tight as a drum, and any potential supply disruptions will push prices higher again.

For soybeans, unabashed export demand kept prices moving upward. Beans gained more than 30 cents after the bearish wheat figures in the WASDE report pulled the entire grain complex lower early in the week. January futures surged through the 50-day moving average near $14.89/bu. last Friday, opening the door for a move above $15.00.

"Soybeans appear poised for a move higher into the Jan. 11 USDA report," Knorr said. "(Last) Tuesday's decision to make no changes to Chinese imports or South American production suggests that the agency is waiting for more data on both. Upside in beans in 2013 still looks limited without bullish weather news from South America or signs that Chinese demand is greater than forecasted."

Ingredient watch

Corn prices fell last week, with processor and terminal bids off more than 30 cents. Soybeans slipped somewhat, but high-protein soybean meal prices picked up more than $5 per ton as demand continued to grow.

The ongoing price appreciation in soybean meal and other oilseed meals made the continued slide in animal protein meals that much tougher for marketers to swallow.

"I'm just getting beat up week after week," one renderer reported last week. "It's a comfort level with the nutritionists; poultry guys could use more, but they're making money and reluctant to make changes to rations."

Meat and bone meal prices dropped another $25 per ton last week and are now well below prices for soybean meal, suggesting that bargains will be plentiful if feeders want to book some extra profit potential.

"I haven't seen (meat and bone meal) like this in 30 years," one source reported.

Poultry byproducts were steady as higher prices for fish meal underpinned substitutes. Grease markets firmed slightly last week, while pet food-grade ingredients could potentially trend higher after the holidays.

Distillers grains appreciated slightly last week as production dipped a bit. Ethanol stocks were at their highest levels since June, according to data from the Energy Information Administration, so producers may throttle back production further.

Editor's Note: Ragan discussed the factors that will affect the grain and processing business in 2013 in a recent episode of the "Feedstuffs In Focus" podcast at www.Feedstuffs.com.

Volume:84 Issue:52