Market analysts see surprises in major U.S.D.A. grain reports

by Jay Sjerven
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KANSAS CITY — By mid-April, farmers across the northern Plains were logging astounding early progress in planting the 2012 spring wheat crop even as winter wheat was developing at least two or three weeks ahead of the average pace in many states.

While area planted to spring wheat other than durum was forecast to be the smallest since 1983, because of the early and outstanding start to the growing season for winter wheat, which was planted across an area 3% larger than a year ago, wheat production in the United States in 2012 was expected by many to expand from 2011.

With U.S. and world wheat supplies ample and forecast to remain at comfortable levels in the new crop year — even though world wheat production was expected to decline from the 2011-12 record — wheat prices may trend lower in the next few months and even into the fall, barring an unanticipated weather threat to wheat or the fall crops, according to market analysts interviewed by Milling & Baking News.
The U.S. Department of Agriculture in the past three weeks issued three reports describing the U.S. and world wheat situations as the new crop year approached — the Prospective Plantings and Grain Stocks (March 1) reports released on March 30 and the April World Agricultural Supply & Demand Estimates issued on April 10.

“The reports were supportive and a little surprising,” Paul Meyers, chief agricultural economist, Foresight Commodity Service, Inc., said of the plantings and grain stocks reports.

The U.S.D.A. in the Prospective Plantings report indicated producers intend to plant 11,976,000 acres of spring wheat other than durum, down 3% from 12,394,000 acres in 2011 and compared with 13,698,000 acres in 2010. Mr. Meyers pointed out the forecast fell about 1.4 million acres below the average of pre-report trade estimates.

That spring wheat plantings for this year were forecast lower than in 2011 was quite a surprise given the excessively wet spring last year prevented producers from seeding 1.7 million acres they had intended.
“So the market thought at least some of those acres were going to come back into wheat production,” Mr. Meyers said. “But it appears the strong corn and soybean prices persuaded farmers in Minnesota and the Dakotas to switch acres from spring wheat to those crops, corn in particular.”

The Grain Stocks report also contained surprises related to wheat and corn that helped spark a rally across agricultural markets on March 30. The U.S.D.A. estimated March 1 wheat stocks at 1,201 million bus, which was about 35 million bus below pre-report trade estimates. The corn stocks estimate was 6,009 million bus, well below trade expectations. Both estimates implied larger usage for the grains than what the U.S.D.A. earlier suggested.

The U.S.D.A. in its April WASDE made two adjustments to the 2011-12 all-wheat balance sheet. First, it lowered its forecast for seed use of wheat in the current year to 79 million bus, down 3 million bus from the March outlook, primarily because of the smaller area forecast to be planted to spring wheat.

And second, the U.S.D.A. raised its forecast for feed and residual use of wheat in 2011-12 to 180 million bus, up 35 million bus from the March projection and compared with 132 million bus in the previous year. The adjustment reflected March 1 wheat stocks data indicating wheat feeding during the December-February quarter was larger than earlier estimated. The grain trade saw the new feed use forecast as an acknowledgment earlier projections understated the extent of wheat feeding.

The U.S.D.A.’s new forecast for the carryover of wheat on June 1, 2012, was 793 million bus, down 32 million bus from the March outlook and down 69 million bus, or 8%, from 862 million bus in 2011. The 2012 carryover as forecast would be the smallest since 657 million bus in 2009 and compared with the recent multi-year-high level of 976 million bus in 2010 and the multi-decade-low level of 306 million bus in 2008. Wheat supplies in the coming year, then, were forecast to be tighter than in 2011-12 but still comfortable by historical measures.

The WASDE surprised markets by leaving the U.S.D.A.’s forecast for the 2012 corn carryover on Sept. 1 at 801 million bus despite the higher-than-expected usage during the December-February quarter.
“If I’m a trader or end user and I have money on the line, I find there is confusion with the U.S.D.A. reports, especially with regard to corn,” said Steve Freed, vice-president, ADM Investor Services, Chicago. “People scratch their heads at the unchanged corn supply-and-demand because the stocks report implied more usage.”

Mr. Freed said the U.S.D.A. seemed to believe corn usage for the remainder of the crop year would decline, there was going to be more wheat feeding this summer at the expense of corn, and since the corn crop was being seeded earlier than usual, some new crop corn may be available to fill some old crop demand. Nevertheless, the market’s confidence in the U.S.D.A. having a firm grasp on just how much corn is held in the country was lessened by the estimates, he said.

While the markets pondered the reports, the U.S.D.A. issued its second weekly Crop Progress report of the season that held out great promise for this year’s winter wheat crop. The U.S.D.A. indicated 61% of the nation’s winter wheat crop was in good to excellent condition on April 8 compared with 36% on the same date in 2011. The ratings in most states have improved steadily since the fall. In its final Crop Progress report of 2011, issued on Nov. 28, the U.S.D.A. indicated 52% of the winter wheat crop planted for harvest in 2012 was in good to excellent condition.

Winter wheat rated good to excellent on April 8 in the key hard red winter wheat state of Kansas was 65% compared with 47% last November. In April 2011, last year’s Kansas crop was rated 28% good to excellent.

Crop condition improvement in Oklahoma has been remarkable and made possible by ample winter rain and no freeze threat to the crop. The Oklahoma crop was rated 77% good to excellent on April 8 compared with 56% in November. Last year in April, the 2011 Oklahoma wheat crop was rated 11% good to excellent and 60% poor to very poor.

The grip of drought on Texas was shaken even if not entirely broken during the winter, and the winter wheat crop there rated fair or better was 69% (with 38% good to excellent) compared with 60% in November (25% good to excellent).

The Southeast was dry, but most other soft red winter wheat states received good moisture over the winter. In some states, notably Ohio, rain was excessive, preventing many acres from being planted in the fall and exacting a toll on early spring condition ratings of the wheat that was planted. The Ohio crop was rated 50% good to excellent and 33% fair on April 8. But wheat condition in the western Corn Belt was outstanding with wheat rated good to excellent at 84% in Illinois and 83% in Indiana. North Carolina wheat was rated 91% good to excellent.

The warmest March on record pushed crop progress well ahead of the average pace across the country. On April 8, 79% of Kansas wheat was jointed compared with 32% as the recent five-year average for the date, and 41% of the Oklahoma crop was headed compared with 6% as the average. The Kansas crop’s development was about three weeks ahead of the normal pace.

Mr. Meyers said given the strong start to the winter wheat growing season, “My estimate for wheat production this year would be for an increase of almost 10% from 2011.” U.S. wheat production in 2011 was 1,999 million bus.

“But production might have been up 14% or 15% had spring wheat farmers planted as much as the market earlier expected,” Mr. Meyers said.

The prospect for increased hard winter wheat yields and an early harvest had end users looking for higher protein in the crop a bit concerned, said Mr. Freed.

“They’d like the crop to slow down a bit,” he said. “They’d also like it to get a little heat to push the protein.”

Looking forward to the summer and the rest of the 2012-13 marketing year, Mr. Meyers said, “A bigger hard red winter wheat crop and the price spread between corn and wheat would suggest a fair amount of wheat feeding. We’re also likely to see a pickup in U.S. wheat exports. It looks like the European Union crop is going to be a little smaller this year. Australia probably will have a smaller crop than this year’s record. But a year from this June 1, the 2013 carryover will probably be close to what it will be this June 1, which is still comfortable.”

While the U.S.D.A. won’t issue its initial 2012-13 world wheat supply-and-demand projections until its May WASDE, the International Grains Council on April 2 forecast world wheat ending stocks in the upcoming year at 208 million tonnes, down just 2 million tonnes from its forecast for the current year but up 8 million tonnes from 2010-11. The I.G.C. forecast world wheat production in 2012-13 at 681 million tonnes, down 15 million tonnes from the record 696 million tonnes in the current year but still the second-largest world wheat outturn ever.

The I.G.C. stated in its April report, “Crops may be smaller in Australia, Kazakhstan, Morocco and Ukraine, but better outcomes are expected in North America and Russia. Global consumption is forecast to grow only modestly, with gains in food and industrial use partly offset by a fall in feed. Nevertheless, feed use is expected to remain at a relatively high level because of ample global supplies. World stocks are forecast to recede from the past year’s peak, but availabilities should remain comfortable, including in the major exporters. Some reduction in world wheat trade is forecast, mainly due to lower purchases for feed amid improved supplies of maize and barley.”

Mr. Freed said wheat price trends in the next few months will be determined largely by weather and the overall economy. There seemed to be no severe weather threats forecast to rally wheat markets. Concerns over the impact of cold weather and winter kill mostly in eastern Europe and dryness in parts of western Europe have been factored into the market. There was concern over dryness in Canada and the U.S. northern Plains, but there was time for these areas to get moisture.

The economy may prove to be as problematic and uncertain as the weather, Mr. Freed said. There were concerns the world economy may begin to falter once again.

“Money seems to be betting economies are going to slow, which would be bad for commodities in general,” he said.

Certainly, corn prices will exert tremendous influence on the wheat market in coming months. The U.S.D.A. in its Prospective Plantings report indicated farmers intend to plant 95.9 million acres to corn this year. The 2012 corn area would be the largest since 1937.

Mr. Meyers said corn yields likely will rebound from below-trend levels in the past two years. If so, with the large area planted to the crop, U.S. producers may harvest a record 14 billion bus of corn in 2012. He expected corn prices to be underpinned until mid-May or June. But prices may begin to fall once the crop is planted and if it gets off to a good start.

“New crop corn prices, which are about $5.50 now, may drop $1 a bu or more depending on the size of the crop,” Mr. Meyers said. “And with that, wheat prices are likely to be under considerable pressure. In this past year, the fact corn prices held up so strong kept wheat prices from dropping as far as they otherwise would have.”

If corn drops to $4.50 a bu, the market may see Chicago wheat futures as low as $5@5.25 a bu, Mr. Meyers said. He added that he expects Kansas City wheat futures to trade about 30c higher than Chicago contracts, and Minneapolis futures to trade about $1 or so above Kansas City.

Mr. Myers said he expected because of the prospective huge corn crop, wheat prices, rather than advancing seasonally in the fall (the common post-harvest rally), would continue to decline in sympathy with corn futures.

Asked how bakers should navigate their flour booking in the next few months, Mr. Freed said, “My understanding is they have a lot of coverage through the end of this marketing year and have begun to peck away at July-September and October-December. The end user is in a crap shoot. If he has profits, he probably should lock some of that in by extending coverage. If he’s following a trend, the trend should be his friend as prices should move lower. If you’re a gambler, you may want to wait for the weather or the trend to change.”
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