Corn crop dictates direction of other grains

by Ron Sterk and Jay Sjerven
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KANSAS CITY — The forecast smallest corn crop in six years already has and will continue to dictate price direction for wheat and soy complex prices, analysts told Milling & Baking News after the Aug. 10 U.S. Department of Agriculture Crop Production and World Agricultural Supply and Demand Estimates reports. And some expect the final production number may be smaller yet, driving corn futures prices to new record highs before the end of the year.

What started as a promising season with warm weather allowing early and rapid planting, which producers expected would result in pollination a couple of weeks ahead of what typically is the hottest, driest part of the summer in late July and early August, quickly turned sour as the worst drought in about half a century spread across the Corn Belt.

The U.S.D.A.’s first survey-based corn production estimate of 10,779 million bus came in below the 10,971 million bu average of trade expectations and would be the smallest crop since 10,531 million bus in 2006. The estimate was down 13% from 12,358 million bus produced in 2011, 17% below the U.S.D.A.’s non-survey July projection of 12,970 million bus and 27% below the department’s initial May projection of a record 14,790 million bus.

“I think this is the largest number we will see for this year’s crop,” said Paul Meyers, chief agricultural economist, Foresight Commodity Services, Inc. “We could lose another 700,000 bus.”

He suggested U.S.D.A. numbers for yield, harvested area and consequently production, were too high.
Based on Aug. 1 conditions, the U.S.D.A. forecast the average 2012 corn yield at 123.4 bus an acre, down 23.8 bus, or 16%, from 147.2 bus an acre in 2011 and the lowest since 113.5 bus an acre in 1995. The yield estimate was down 22.6 bus from the non-survey July projection of 146 bus an acre and down 42.6 bus, or 26%, from the department’s initial projection in May of 166 bus an acre.

The U.S.D.A. noted scarce rainfall and record-breaking temperatures in June, followed by dry weather and “brutally hot” temperatures in early July resulted in a rapid decline in corn conditions.

U.S.D.A. condition ratings aggregated for the 18 largest corn growing states on July 29 (about the time of the crop survey for the Aug. 10 Crop Production report) were 24% good to excellent, 28% fair and 48% poor to very poor, compared with 62% good to excellent, 24% fair and 14% poor to very poor a year earlier. The ratings declined slightly in early August but have since leveled off as the weather finally moderated.

As crop condition ratings continually declined, corn futures prices soared more than 50% from mid-June to late July, setting a record high of $8.49 a bu in the December contract on Aug. 10.

Harvested area was forecast at 87.4 million acres, down 2% from 88.9 million acres in the previous forecast, which was based on U.S.D.A. June Acreage report numbers, but up 4% from 84 million acres in 2011. If realized, harvested area still would be the highest since 1933.

Indicated abandonment of just over 9%, (based on planted area of 96.4 million acres — the highest since 1937 — and harvested area of 87.4 million acres) was slightly above the usual 8% to 9% and considered too low by some analysts as a greater number of drought-ravaged acres become unprofitable to harvest.
“By the time it’s all done, we may see harvested area down 3 million to 4 million acres from the June
Acreage report,” Mr. Meyers said. “I think the U.S.D.A. didn’t capture all of the abandoned acres.”

That would be 1.5 million to 2.5 million acres below the U.S.D.A.’s Aug. 10 number, which was down only 1.5 million acres from the Acreage report, with an abandonment rate of 11% to 12%, which is more in line with severe drought years.

Such a drastically lower-than-expected corn crop means less supply for all use areas, as well as stock levels.

U.S. corn carryover on Sept. 1, 2013, was projected in the Aug. 10 WASDE at 650 million bus, down 533 million bus, or 45%, from 1,183 million bus in July and down 371 million bus, or 36%, from an upwardly revised 1,021 million bus estimated in 2012. The U.S.D.A. 2013 corn carryover number was near the average of pre-report trade expectations.

Mr. Meyers suggested 2013 carryover may fall to historic lows around 550 million bus as the crop shrinks further.

Total supply for 2012-13 was projected by the U.S.D.A. at 11,875 million bus, down 2,028 million bus, or 15%, from July and down 1,636 million bus, or 12%, from 13,511 million bus in 2011-12. Total use in 2012-13 was projected at 11,225 million bus, down 12% from 12,720 million bus projected in July and down 10% from 12,490 million bus estimated in 2011-12.

“Total corn supply has been less than the previous year’s total use only two other times in the last 60 years,” Mr. Meyers said, noting similar situations in 1974-75 and 1995-96.

Projected feed and residual use in 2012-13 was projected at 4,075 million bus, down 725 million bus, or 15%, from 4,800 million bus in July and down 475 million bus, or 10%, from 4,550 million bus in 2011-12. Food, seed and industrial use was projected at 5,850 million bus, down 470 million bus from July (including corn for ethanol at 4,500 million bus, down 400 million bus, and food and seed use at 1,350 million bus, down 70 million bus from July), and down 540 million bus from 6,390 million bus in 2011-12 (including corn for ethanol down 500 million bus from 2011-12 and food and seed use down 40 million bus).

U.S. corn exports in 2012-13 were projected at 1,300 million bus, down 300 million bus, or 19%, from 1,600 million bus in July and down 250 bus, or 16%, from 1,550 million bus the previous year.

The U.S.D.A. projected the average price paid to farmers for corn in 2012-13 to range from $7.50@8.90 a bu, up sharply from $5.40@6.40 in July and compared with $6.20@6.30 in 2011-12.

“We have to ration demand, but at what price,” Mr. Meyers said. “December corn futures could go to $9 a bu between now and the end of November if the crop gets smaller and carryover declines further.”
Despite the recent pullback from record highs, he expects corn futures prices will trade in the $8@8.50 a bu range in coming months.

If corn prices approach $9 a bu, there would be added pressure on Congress to reduce the ethanol mandate, Mr. Meyers said, but if prices stay around $8, “they might not do anything.”

Livestock feeders will (or already have) feel the most pain with cash basis levels also expected to be strong, resulting in record high feed prices. Farmers, coming off two or three years of strong corn prices, are expected to be firm holders of their 2012 corn crop.

In addition to forecast increased wheat feeding, modest relief also may be seen from increased production from 2011 of sorghum, barley and oats.

Soybeans still have hope

Although U.S.D.A. crop condition ratings for soybeans have been nearly as bad as those for corn, the drought’s actual effect on the soybean crop is expected to be somewhat less than on corn. But due to extremely tight soybean stocks, the price impact may be just as great.

“The soybean situation was tight even before the drought,” Mr. Meyers noted. He suggested soybean supplies will remain especially tight until the South American harvest begins early next year.

The U.S.D.A. on Aug. 10 forecast U.S. soybean production at 2,692 million bus, down 12% from 3,056 million bus in 2011 and 3,050 million bus forecast in July and down 16% from the initial May projection of 3,205 million bus. If realized it would be the smallest crop since 2,677 million bus in 2007. The soybean number was below the pre-report average of 2,786 million bus.

Average soybean yield was forecast at 36.1 bus an acre, down 5.4 bus from 41.5 bus an acre in 2011 and the lowest since 33.9 bus an acre in 2003. Forecast yield was down 4.4 bus from 40.5 bus an acre in July and down 7.8 bus, or 18%, from 43.9 bus an acre as the initial projection in May. Harvested area was forecast at 74.6 million acres, down 1% from 75.3 million acres forecast previously but up 1% from 73.6 million acres in 2011 and still the fourth largest on record if realized.

Mr. Meyers said the soybean crop has about an equal chance of getting larger or smaller depending on weather over the next few weeks, although it still will be much smaller than first projected.

Carryover of U.S. soybeans on Sept. 1, 2012, was projected at 115 million bus, down 15 million bus, or 12%, from 130 million bus in July and down 30 million bus, or 21%, from a downwardly revised 145 million bus estimated for this year. The U.S.D.A. 2013 soybean carryover number was as expected by the trade.

Total supply in 2012-13 was projected at 2,857 million bus, down 378 million bus, or 12%, from 3,235 million bus in July and down 429 million bus, or 13%, from 3,286 million bus in 2011-12.

Total use of soybeans in 2012-13 was projected at 2,742 million bus, down 363 million bus, or 12%, from 3,105 million bus in July and down 399 million bus, or 13%, from 3,141 million bus in 2011-12. Crushings were projected at 1,515 million bus, down 95 million bus from July and down 175 million bus from 1,690 million bus in 2011-12. Exports were projected at 1,110 million bus, down 260 million bus, or 19%, from 1,370 million bus in July and down 240 million bus, or 18%, from an upwardly revised 1,350 million bus in 2011-12.

The average farm price of soybeans in 2012-13 was projected to range from $15@17 a bu, up $2 from July and compared with $12.45 in 2011-12.

Mr. Meyers said he expects soybean futures prices to range from $16.25@16.75 a bu through December, with soybean meal in the $495@510 a ton range and soybean oil around 53@55½c a lb. Prices should get some relief from a projected 30% larger South American soybean crop, harvest of which begins in the first half of 2013. He expects U.S. soybean futures to trade from $15½@16 a bu in the first quarter of 2013 and $14@14½ a bu in the second quarter.

“South America can respond” to the high prices, Mr. Meyers said. Soybean and soy product users tend to benefit more from Southern Hemisphere soybean production than do corn users, who may see some help as well, he said. But U.S. corn supplies “will remain tight until this time next year,” he added. 

Wheat combines race against drought, and win

KANSAS CITY — Wheat stood out as the outstanding survivor of the great American drought of 2012. While early hopes for a record corn crop evaporated under the searing summer sun, a record early start to the wheat harvest pit producers and combines against a rapidly expanding drought in a race against the clock. The combines won.

By the end of July, the winter wheat harvest was completed except in Montana and the Pacific Northwest, and the spring wheat harvest was more than two-thirds completed by mid-August. The drought was only just extending into the northern Plains when a large percentage of the region’s spring wheat crop already was entering marketing channels or stored safely in the bin. Remarkably, spring wheat crop condition ratings improved just as the harvest was getting under way.

In a season of contrasts, the U.S. Department of Agriculture in its World Agricultural Supply and Demand Estimates report issued on Aug. 10 lowered its forecasts for corn production and average corn yield to 10,779 million bus and 123.4 bus per acre, respectively, but raised its forecasts for wheat production and average wheat yield to 2,268 million bus and 46.5 bus per acre. The average corn yield was forecast to be the lowest since 1995. The average wheat yield was forecast to be a new record high. While many crop observers suggested the corn crop and average corn yield may turn out to be lower than the current U.S.D.A. forecasts, they tended to think the wheat crop and average wheat yield may turn out to be even higher.

“Even though we lost some bushels in the central and southern Plains, and even lost a few bushels in some of the spring wheat areas of the United States to the heat and dryness, overall, wheat yield this year was forecast to be a new record,” said Paul Meyers, chief agricultural economist, Foresight Commodity Services, Inc. “Even in the August Crop Production report, the U.S.D.A.’s production number was 20 million bus higher than the trade guess. Now we have to wait until the end of September (when the U.S.D.A. issues its Small Grains Summary) to get the real number, but I wouldn’t be surprised if the crop isn’t reported even a little bit larger, based on the reports I’ve heard about the spring wheat yields being exceptional in some areas.”

Not only was the wheat crop larger than expected, its quality was very good. U.S. Wheat Associates in its harvest reports indicated both the hard red winter wheat crop and the soft red winter wheat crop earned an average grade of No. 1, the highest grade, and initial samples from the hard red spring wheat harvest pointed to a premium grade for that crop as well.

While U.S. wheat without doubt was a success story this year when compared with the other principal field crops, wheat prices remained historically strong. In fact, the U.S.D.A. forecast the average farm price of wheat in 2012-13 at a record $7.60@9 a bu compared with $7.24 a bu in 2011-12, the current record, and $5.70 a bu in 2010-11.

Underlying the strength in wheat prices were record corn prices and a tightening world wheat supply situation despite the larger crops estimated for both the United States and Canada.

Mr. Meyers in his price outlook said he expected nearby wheat futures prices in Kansas City to average between $8.75 and $9.15 a bu over the next three or four months. He forecast Chicago nearby wheat futures to trade 10c lower than the K.C. contracts, and Minneapolis nearby wheat futures to trade 30@35c higher than the K.C. futures.

“Corn is the main price driver in the wheat outlook,” Mr. Meyers said. “A forecast 700-million-bu U.S. 2013 wheat carryover — and I’m about 45 million bus higher than that — and world wheat 2012-13 ending stocks forecast at 177 million tonnes do not by themselves support $9 Kansas City wheat. But if corn prices are going to be $8 or higher, even if the wheat/corn spread narrows a bit, it will be hard for wheat prices to fall very much.

The U.S.D.A. on Aug. 10 forecast feed and residual use of wheat in 2012-13 at 220 million bus, up 20 million bus from the July outlook and up 35% from 163 million bus in 2011-12. The U.S.D.A. attributed the higher feed use outlook to the tighter supply situation for corn. It would be the largest feed and residual usage for wheat since 255 million bus in 2008-09.

Wheat competes with corn as a feed grain especially during the summer, when wheat is being harvested and more available and corn stocks continued to decline with the corn harvest still weeks away. The amount of wheat fed during this period hinges on the spread between wheat and corn prices. The narrower the spread, the more likely wheat will be fed heavily. The wider the spread, assuming corn trades at a discount to wheat, which typically is the case, the less wheat is fed to livestock.

Mr. Meyers questioned the U.S.D.A.’s raising the feed and residual use forecast.

“I’m using a lower feed and residual number than the U.S.D.A. because we didn’t have a very narrow wheat/corn spread during June-July, when we typically feed the most wheat,” Mr. Meyers said. “The spread widened at that time, particularly early in that span because in late May and early June, corn prices were $5 a bu, and it looked like they were going lower. I think given the spread early in the summer, the 220-million-bu forecast by the U.S.D.A. may turn out to be a little too high. I’m using 200 million bus.”

Looking to the wheat/corn price spread in coming months, Mr. Meyers said, “My expectation is that the wheat/corn spread will weaken or narrow in a bit in the next few months in part because the U.S. and world wheat situations suggest adequate or slightly more than adequate wheat stocks, whereas with the drought in U.S. corn areas, corn prices still may move higher. The spread may narrow by 10c or 15c in Chicago. But I don’t think it will narrow so much that we will see much additional wheat feeding, in part because if you feed much more wheat, you tighten the wheat supply and demand situation in the United States.”

Mr. Meyers said he thought the spread would hold between 65c and 75c with Chicago wheat trading at a premium to corn.

The U.S.D.A. in its WASDE left unchanged its forecast for U.S. wheat exports in 2012-13 at 1,200 million bus, despite export commitments thus far this marketing year running behind those of a year ago. The United States exported 1,050 million bus of wheat in 2011-12.

The U.S.D.A. in its August Wheat Outlook issued Aug. 14 commented, “Competition among exporters for 2012-13 is driven by a massive reduction in Russian exports following its wheat production cut. Projected U.S. exports are unchanged as high domestic wheat prices spurred by skyrocketing corn prices are expected to limit the competitiveness of U.S. supplies in world markets.”

The U.S.D.A. estimated Russian wheat production this year at 43 million bus, down 6 million bus from the July forecast and down 13 million bus from the department’s initial forecast for Russian wheat production issued in May. Russia turned out 56.3 million tonnes of wheat last year.

Russian wheat exports in 2012-13 were forecast at 8 million tonnes, down 4 million tonnes from the July outlook, down 10 million tonnes from the initial forecast issued in May and compared with 21 million tonnes in 2011-12.

Mr. Meyers pointed to the drought-reduced Russian crop as the principal reason the U.S.D.A. left its export forecast unchanged despite the slower outgo to date this crop year.

Commenting on the slower pace of U.S. exports compared with 2011-12, Mr. Meyers said, “Two or three months ago, the U.S.D.A. thought the summer would be a robust period for U.S. exports because of our larger crop and availability and because the European Union and Russia might not be as aggressive in selling wheat abroad. That hasn’t been the case.”

Mr. Meyers pointed to last week’s sales of Russian wheat to Egypt, the world’s largest wheat importer. U.S. wheat prices were too high, and the Egyptians didn’t seriously consider U.S. offers when presented the much lower Russian pricing.

At the same time, there remained a possibility that Russia, despite recent statements to the contrary, may put on an export tax to slow exports should the Russian government grow more concerned about containing domestic food price inflation that may rise in the view of the short grain crops, Mr. Meyers said. Such an action would shift additional world demand to other suppliers, including the United States.
“Also, we are not yet sure about the Southern Hemisphere crops,” Mr. Meyers said. “I think the U.S.D.A. just wanted to take time to see what happens in the short term. The export pace actually has picked up in the past 30 days. The spread between last year’s and this year’s export commitments has narrowed.”

Asked whether we might see a replay of the 2007 and 2008 world food price crisis, Mr. Meyers observed, “Supplies of grain and oilseeds will be extremely tight, but one of the differences between now and 2008 was that in 2008 there was a wheat shortage, and the food aspect of wheat and flour was more front and center.”

Mr. Meyers also pointed out that in 2008, the world grappled with crude oil prices at $140 barrel and a collapsing dollar index. “I don’t see those things happening again."

“So, you don’t have those two outside factors nearly as bullish today as in 2008,” he said.

Nevertheless, while wheat supplies were expected to remain adequate, bakers and other users of wheat flour and other wheat products without doubt face a year with prices sharply higher than were forecast before the great drought of 2012 began its reign.

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