Fundamentals weigh on wheat prices, but outside markets bear watching

by Jay Sjerven and Ron Sterk
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With U.S. and world wheat supplies ample and a large world crop forecast for 2010-11, bearish supply-and-demand fundamentals have pushed to the fore to become the principal driver of near-term wheat price direction, according to analysts interviewed by Milling & Baking News. Wheat price volatility has diminished markedly in the past several months and seemed certain to remain tame in comparison with what roiled markets during the past three years. At the same time, bakers and other users of grain products must keep a close watch on outside markets as well as spring weather and harvest prospects for any change that might rally prices.

“A lot of people believe we’re in a trading range until we know more about the new crop,” said Steve Freed, vice-president, ADM Investment Services, Chicago. “There are no problems with the world wheat crops, and world wheat prices are at a discount to U.S. prices. Even though the U.S. Department of Agriculture raised its export number in its April World Agricultural Supply and Demand Estimates (WASDE), our export demand still is around 30-year lows. It probably is too soon to take Chicago July wheat below $4.50 a bu, until we know more about the size of the 2010 crop, but there is no need to trade above $5.”

Paul Meyers, vice-president of commodity analysis, Connell Purchasing Services, Berkeley Heights, N.J., said during the next several weeks, wheat prices should ease.

“In part, the assumption is the corn, soybean and spring wheat crops will get planted pretty much on schedule, so there won’t be any significant delays like we saw last year to rally prices,” he said. “As long as corn and soybean prices trend lower through the planting season, wheat prices should come down as well. New crop prospects for Northern Hemisphere winter wheat crops are generally pretty good, and I look for a third consecutive year of increasing world and U.S. ending stocks.”

The recovery of U.S. and global wheat stocks during the past couple of years from the lowest levels since shortly after World War II in the case of the United States and since the early 1980s on a world level has been astounding, a testament to what can be accomplished when high prices motivate producers and weather is favorable.

The U.S.D.A. on April 12 projected the carryover of wheat in the United States on June 1, 2010, at 950 million bus. It would be the largest U.S. wheat carryover since 1,261 million bus in 1988.

In the case of world wheat, the U.S.D.A. projected 2009-10 ending stocks at 195.82 million tonnes, up 30.59 million tonnes, or 19%, from 165.23 million tonnes in 2008-09 and up 73.16 million tonnes, or 60%, from a 26-year low of 122.66 million tonnes in 2007-08. The world wheat inventory at the end of 2009-10 was projected to be the largest since 2001-02.

Record world wheat production in 2008-09 at 683.27 million tonnes and a 2009-10 crop nearly as large at 678.42 million tonnes refilled wheat stores in the major exporting nations and resulted in decreased demand from key traditional importers who found their own grain production increased as well.

With world grain inventories replenished, world wheat exports dropped sharply in the current year to a projected 125.89 million tonnes from a record 143.01 million tonnes in 2008-09. The U.S. share in world wheat trade eroded as world prices were at discounts to those asked for U.S. supply, in large part because of the recent advance in the value of the dollar.

The U.S.D.A. in April projected U.S. wheat exports in 2009-10 at 865 million bus, down 150 million bus, or 15%, from 1,015 million bus. It would be the smallest U.S. wheat outgo since 850 million bus in 2002-03. With the exception of the latter year, U.S. wheat exports for the current year were forecast to be the lowest since 1971-72. The U.S.D.A. projected the U.S. share of world wheat exports in the current year at 18.7% compared with 19.3% in 2008-09 and 29.3% in 2007-08. In the latter year, crop shortfalls in several exporting countries encouraged world buyers to turn to the United States.

U.S. wheat exports weren’t expected to improve much in the coming year.

Mr. Meyers said world trade in wheat, if it increases in 2010-11, would do so only modestly. Meanwhile, large carryover stocks in major exporting countries and expectations some nations will harvest even larger crops in 2010-11 will limit the prospects for U.S. wheat. In addition to traditional competitors in world wheat markets, the United States might face new competition from nations such as India and Pakistan that have indicated they could become net exporters of wheat to ease storage problems.

“Any export increase for us next year will be fairly small, and we will face the same issues in coming years,” Mr. Meyers said.

“The U.S.D.A. recently put out a 10-year forecast on world trade. In all three commodities — wheat, corn and soybeans — we lose market share over the next 10 years,” Mr. Freed said. “The U.S. share of world wheat exports drops from around 20% to about 16%, with U.S. wheat increasingly displaced by Black Sea wheat. At the end of 10 years, Black Sea nations and other European nations grow more wheat and satisfy more of the world’s demand. South America will be growing more soybeans and satisfying more of the world’s demand. And we’re going to be planting a lot of corn. It might be the only wheat and soybeans we’ll be growing will be that required to satisfy domestic demand.”

Anemic foreign demand for U.S. wheat has been a major factor pushing wheat futures prices lower with new contract lows recently set on all three exchanges.

The prospect of a much smaller U.S. wheat crop in 2010 compared with those harvested in recent years wasn’t expected to pull down domestic stocks much if at all in 2010-11 because of the sluggish demand.

The U.S.D.A. on April 12, on the basis of a revised winter wheat plantings estimate and a survey of producers’ spring growing intentions, projected area planted to all wheat in the United States for harvest this year at 53,827,000 acres, down 5,306,000 acres, or 9%, from 59,133,000 acres in 2009. If the projection is realized, area planted to all wheat in the United States this year would be the smallest since 1970. The recent five-year average all-wheat-planted area was 59,467,000 acres.

The U.S.D.A. estimate of the winter wheat area planted for harvest this year was 37,698,000 acres, down 5,613,000 acres, or 13%, from 43,311,000 acres in 2009. The winter wheat planted area also was the smallest

since 1970 and compared with the recent five-year average winter wheat area at 43,123,000 acres.

The U.S.D.A.’s winter wheat planting estimates for Illinois, Indiana, Missouri, Nebraska and Ohio were record low.

The U.S.D.A. said U.S. producers intend to plant 13,906,000 acres to spring wheat other than durum this year, up 638,000 acres, or 5%, from 13,268,000 acres in 2009. While up from 2009, the intended other-spring wheat area in 2010 was below the recent five-year average area of 13,932,000 acres.

In addition to encountering planting problems because of a delayed row crop harvest and wet conditions last fall, especially in key soft red winter wheat states, many producers turned to other crops that promised to generate more income.

“Last year at harvest, wheat producers encountered a lot of discounts for quality and protein,” Mr. Freed said. “I think farmers are getting some pretty low prices for their wheat. You can blame part of that on the weather, but you need an export market to have higher prices, and the export market is just not strong.

“In its April WASDE, the U.S.D.A. raised feed usage of wheat, but for that to happen, wheat has to compete with corn as a feed grain. Cash wheat

prices are almost down to levels cheaper than corn in some areas.”

Mr. Freed said in soft red winter wheat areas where only 20% to 30% of wheat was rated in good to excellent condition, producers might decide to tear up their wheat fields and plant $9 a bu soybeans.

“We haven’t reached the point where wheat prices are high enough for a producer in the Midwest to make as much money on wheat as he could on corn and soybeans,” he said.

Mr. Meyers pointed out many producers in the hard winter wheat states also have explored options. He said there are areas in Kansas and Texas where producers can plant corn, soybeans and cotton as well as wheat, and some producers there have switched from wheat to one or more of those crops.

“Getting farmers to plant wheat increasingly will be a problem given more rapidly rising yields we see in corn and soybeans compared with a much more modest upward trend in wheat yields,” Mr. Meyers said.

In its first Crop Progress report of the season, the U.S.D.A. rated the condition of the winter wheat crop on April 4 at 13% excellent, 52% good, 29% fair, 5% poor and 1% very poor. The rating was among the highest in recent years. The hard winter wheat crop in particular began the growing season with strong ratings. The winter, while bitterly cold, brought ample precipitation that has fueled rapid and lush growth across most of the hard winter wheat region.

Crop condition ratings were less auspicious in some key soft red winter wheat states, especially Illinois, Missouri and North Carolina.

The U.S.D.A. won’t issue its first official forecast of winter wheat production until the May Crop Production report, which will be released May 11, but soft wheat millers meeting in Fort Lauderdale, Fla., in late March forecast soft red winter wheat production in 2010 at 288,636,000 bus, down 28% from 403,563,000 bus in 2009 and the lowest since 188,920,000 bus in 1978.

Ordinarily, such a drop in soft red winter wheat production would be expected to push prices sharply higher, but Mr. Meyers and Mr. Freed pointed out a forecast record 211-million-bu soft red winter wheat carryover for 2010 suggested there would be no shortage for the wheat class during 2010-11.

“While production of soft red winter wheat may fall nearly 30% from a year ago, supply was expected to decline only 15% from this year’s huge levels,” Mr. Meyers said.

While the U.S.D.A’s initial forecasts for 2010-11 world and U.S. wheat production won’t be issued until May 11, the department’s preliminary forecast for the United States outlined during the 2010 Agricultural Outlook Forum held in late February in Washington was for an all-wheat crop of 1,945 million bus, which would be down 12% from 2,216 million bus as the 2009 outturn.

Separately, the International Grains Council in its March Grain Market Report released March 25 forecast a U.S. wheat crop of 1,984 million bus (54 million tonnes) and forecast 2010-11 world wheat production at 658 million tonnes.

The I.G.C. indicated its forecast of 2010-11 world wheat production should help ensure global wheat ending stocks rise for a third consecutive year. The I.G.C.’s preliminary projection for 2010-11 world wheat ending stocks was 199 million tonnes, up 2 million tonnes from the forecast for the current year.

U.S. wheat stocks at the end of the 2010-11 crop year should be similar to the 950 million bus forecast for the current year, Mr. Meyers and Mr. Freed said.

“We’re likely to add to stocks even with smaller U.S. and world crops,” Mr. Meyers said. “I would expect carryover stocks in the United States in 2011 to rise about 50 million bus from 2010 to about 1 billion bus or a little more. I would expect world wheat ending stocks in 2010-11 to be up about 6 million tonnes from the current year.”

Given the initial strong winter wheat condition ratings, Mr. Freed said he expected U.S. wheat production to hold above 2 billion bus in 2010 compared with the current lower U.S.D.A. and I.G.C. forecasts. He said the range of guesses for the 2011 U.S. wheat carryover was 900 million bus to 1 billion bus. Most analysts are showing a slight reduction in the carryover from 2010, Mr. Freed said.

“Much will depend on the crop size, export demand and how much wheat we feed,” Mr. Freed said. “If we have a huge corn crop, we won’t feed a lot of wheat, it just won’t get that cheap. No one looks for a big rebound in exports unless there is a problem with Black Sea wheat.”

While the U.S. and world wheat fundamentals seemed bearish for both the current year and for 2010-11, outside markets bear watching.

“My outlook primarily is predicated on the bearish fundamentals for wheat,” Mr. Meyers said. “The U.S. dollar has been weakening in the last couple of weeks. Crude oil made 18-month highs. But my expectation is for the dollar to strengthen during the next few months and for crude oil to weaken some. I expect crude oil to trade between $75 to $85 during the next couple of months and the dollar index that is under 81 points now to go back up to 83 or 84 points.”

Mr. Freed saw weaker wheat prices ahead but cautioned, “It seems the stock market goes up every day, and as it goes up, people are getting more confident the economy is getting better. It pulls up energy prices. There has been a pull back in the dollar, which is usually positive to commodities. This may lead to more money in our marketplace, and we all know what happened in 2007, when new money came into markets that we thought were fundamentally bearish.

“So we have to watch closely. Does the stock market continue going up, does the dollar keep going down, does oil keep going up. All of these are factors in money flow and could put the wheat market back up over what we see to be resistance.”

Mr. Freed pointed to other uncertainties, including possible new regulations on some of the index traders in the marketplace to try to limit their impact, especially on energy prices.

“So we don’t know if we’ll be playing on a different playing field,” Mr. Freed said. “Whether banks may trade their proprietary accounts, or whether or not the index traders will lighten the load. In Chicago we have a record short from the traditional funds and a record long from the index funds. We don’t know which is going to blink first.”

Always a factor will be China’s needs, Mr. Freed said. China might have to import corn because of drought in the southern part of the country.

“Is China a corn buyer?” Mr. Freed said. “Will its economy continue to grow? This might not be directly related to wheat, but if demand pushes crude oil above $100 a barrel, wheat prices might not be able to go down.”

But as things stand, Mr. Meyers indicated his price forecast for Kansas City nearby wheat futures was for an average range from $4.55 to $4.85 a bu with a September futures price reaching perhaps $4.30 a bu. Chicago futures, Mr. Meyers said, should be around those levels, perhaps 5c lower, and Minneapolis futures should be around 20c higher than K.C. levels.

Mr. Freed said he expected a $4.25@5.25 trading range

Mr. Meyers said if prices get back to recent contract lows, bakers should finish booking second-quarter needs but hold off on booking most of their summer needs until prices go down to around $4.60 with an eye to the possibility K.C. September wheat might trade down to $4.30 a bu. He added protein premiums also should come under pressure once harvest begins, especially if hard winter wheat and hard spring wheat protein advances to more normal levels after last year’s low-protein crops.

Mr. Freed said any further market weakness should be used to book flour at least through July.

Soybeans: Large supply seen pressuring prices

KANSAS CITY — Forecast record high U.S. 2010 plantings and record large 2009-10 South American production and global stocks are expected to pressure U.S. soybean prices the remainder of the year, according to the U.S. Department of Agriculture and analysts contacted by Milling & Baking News.

“The world is awash in (soybean) supply,” said Dan Basse, market research manager at AgResource Consulting Group in Chicago, adding that it was only in the United States where soybean supplies were tight.

In its March 31 Prospective Plantings report, the U.S.D.A. said U.S. farmers intend to plant a record 78.098 million acres of soybeans in 2010, up about 1% from the previous record in 2009. And in its April 9 World Agricultural Supply and Demand Estimates, the department forecast record large 2009-10 soybean production in Brazil and Argentina of 121.5 million tonnes combined, up 1% from March and up 35% from 2008-09. It also forecast record large 2009-10 global soybean ending stocks of 62.96 million tonnes, up 4% from March and up 47% from a year earlier due largely to recovery in South American production that was reduced by drought last year.

Assuming “normal” weather for the U.S. growing season, Mr. Basse expects November (new crop) soybean futures prices will trade in a range of $7.75@8.25 a bu this fall, down about 15% to 20% from last week’s levels. And he expects 2010-11 U.S. soybean ending stocks to surge to 475 million bus compared with a relatively tight 190 million bus forecast by the U.S.D.A. for 2009-10.

Paul Meyers, vice-president of commodity analysis at Connell Purchasing Services, Berkeley Heights, N.J., also expects weaker soybean values and growing supplies, forecasting November futures prices below $8.50 a bu this fall and soybean carryover that would “most likely be over 300 million bus” next year. He said 2010-11 would be a stocks rebuilding year in the United States as demand weakens and global supply builds from the record large South American crops.

“The crop is made there,” Mr. Meyers said of Brazil’s soybean crop, where the harvest was in its later stages, and of Argentina’s crop, where harvest was about 50% completed.

In its April 12 Oil Crops Outlook the U.S.D.A. said, “It appears U.S. soybean prices may have peaked for the season at the end of 2009.” The preliminary average farm price of soybeans was $9.16 a bu in March, down from a high of $9.80 in December and for the marketing year to date that began Sept. 1, 2009.

Soybean use in the first quarter of the marketing year was record high and continued strong in the second quarter, the U.S.D.A. said, although demand is expected to drop off in the last half of 2009-10. Strong exports to China and record high domestic soybean crush in the first half of the marketing year were major contributors to tight supplies and strong prices.

U.S. soybean exports are forecast record large in 2009-10, having already exceeded last year’s record by April 1, but the large global supplies are expected to sharply curtail foreign demand for U.S. supply for the rest of the marketing year. Soybean oil and soybean meal export sales also have been strong, up 64% and 122%, respectively, for the marketing year through April 1, the U.S.D.A. said.

Contributing to the large crush has been reduced soybean oil yield per bushel, Mr. Meyers said.

Large supplies of soybeans and other oilseeds also are expected to pressure vegetable oil prices. Mr. Meyers forecast December soybean oil futures prices to drop into the 34@35c a lb range this fall from around 41c last week.

The loss of the blending credit and uncertainty about its reinstatement, along with high soybean oil prices have reduced demand for soybean oil to make biodiesel, Mr. Meyers said, noting that the longer the credit is absent, the more soybean oil stocks will remain large. He also expects 2010-11 soybean oil exports to drop by a third or more from this year.

Mr. Basse noted that the weaker commodity prices would bring relief to food processors and livestock producers in the coming year.

Corn: Ethanol demand needed to offset heavy supply

KANSAS CITY — Corn markets will look to ethanol for a potential demand boost amid reduced U.S. livestock numbers and ample global supplies, but corn prices still are headed lower, market analysts told Milling & Baking News.

“Globally there is plenty of corn,” said Paul Meyers, vice-president of commodity analysis at Connell Purchasing Services, Berkeley Heights, N.J.

Although some question remains about the quality of the 2009 U.S. corn crop, 2009-10 global production is forecast record large at 805.7 million tonnes by the U.S. Department of Agriculture. U.S. 2009 corn production was record large at 13,131 million bus, South Africa’s 2009-10 crop is the largest in 30 years, and key South American countries are reporting record high yields, the U.S.D.A. said in its April 13 Feed Outlook.

Meanwhile, intended planted area for corn in the United States in 2010 was forecast at 88.798 million acres, up 3% from 2009 and 2008, the U.S.D.A. said in its recent Prospective Plantings report.

Mr. Meyers said he expects December corn futures to drop to $3.15@3.20 a bu this fall from around $3.85@3.90 last week. He forecast U.S. corn carryover on Sept. 1, 2010, to top 2 billion bus, compared with the U.S.D.A.’s April 9 projection of about 1.9 billion bus, because of reduced feed demand. He said 2009-10 feed use may be about 100 million bus below the U.S.D.A.’s latest projection because of lower livestock numbers and the potential of increased wheat feeding if wheat prices decline.

Although anecdotal reports of poor quality 2009 corn in storage due to high moisture levels at harvest last fall have raised some concerns, Mr. Meyers said the industry has been “pretty good about blending off poor quality.”

An increase in the ethanol blend wall will be critical to offset some effects of the large corn supply and lower livestock numbers, Mr. Meyers said.

Dan Basse, market research manager at AgResource Consulting Group in Chicago, was somewhat more bearish about corn prices, forecasting December futures in the $2.90@3.10 range this fall. He sees carryover at 2.1 billion bus due to competition from increased feeding of wheat and to additional supply of distillers’ dried grain, the result of increased ethanol production.

Mr. Basse agreed an increase in the ethanol blend rate to 15% from 10% was critical, as would be the application of the increase since about 30% of U.S. cars can’t use the higher blend. Recent annual increases in corn demand of 600 million to 900 million bus has been the result of increased use for ethanol, he noted.

Food, seed and industrial use of corn excluding use for ethanol has held relatively stable for several years at around 10% of production, according to U.S.D.A. data. Feed and residual dropped sharply in 2008-09 and rebounded only modestly this year, but still was down 8% from two years ago. Exports also are up slightly this year but still down more than 20% from 2007-08. Use of corn for ethanol, meanwhile, is forecast up 17% from last year and up 41% from 2007-08.

Weather will be a key factor, as always, for the corn crop, Mr. Basse reminded. With planting likely to be earlier than last year do to good spring weather, the key pollination period should be earlier, which boost corn production prospects.

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