by Darin Newsom, DTN Senior Analyst
OMAHA (DTN) — Welcome to 2012-2013! The May report offers USDA’s initial supply-and-demand look at the new marketing year for grains. Also, traders will keep a close eye on old-crop corn and soybeans to see if USDA tightens the ending stocks (and ending stocks-to-use) situation, resulting in smaller beginning stocks for the new crop year.
2011-2012 US ENDING STOCKS
Corn: Domestic corn ending stocks are expected to fall to about 760 million bushels on an increase in demand. Using slightly above-average demand for the second half of the 2011-2012 marketing year and the most recent quarterly stocks number (itself usually questionable), my projection for ending stocks would be closer to 640 mb, below the low end of pre-report estimates of 660 mb. While it is unlikely USDA will trim that much from its April estimate of 801 mb, the commercial side of the market continues to indicate the situation is tighter than USDA is acknowledging.
Soybeans: The reduction in available South American supplies due to the continued decrease in production estimates could increase demand for U.S. supplies. April saw export demand bumped to 1.29 billion bushels, an increase that seems to be outpacing weekly export shipments. Quarterly stocks analysis shows first-half demand up by about 2.5{fd15d42d1b024b97d6d50958be27cc8145b6addb99e015780abccf2984117bb0}. If the same sort of demand is seen throughout the second half, domestic ending stocks could ultimately be trimmed to near 150 mb. However, this will not occur in the May report, leaving the door open to a possible bearish surprise.
Wheat: Domestic wheat ending stocks are expected to decrease by about 12 mb from the April estimate to 781 mb. This would be in line with quarterly stocks analysis that showed demand through the first three quarters of 2011-2012 running about 3.2{fd15d42d1b024b97d6d50958be27cc8145b6addb99e015780abccf2984117bb0} behind average. Projected forward, this would imply about 26{fd15d42d1b024b97d6d50958be27cc8145b6addb99e015780abccf2984117bb0} of total supplies (holding steady at 2.982 bb) remaining at the end of May 2012. With what is expected to be a large 2012-2013 crop looming (pre-report estimates average 10{fd15d42d1b024b97d6d50958be27cc8145b6addb99e015780abccf2984117bb0} larger than last year), even the slight decrease could be viewed as burdensome.
2012-2013 US ENDING STOCKS
Corn: This segment could be the key to how the reports are perceived Thursday. Pre-report estimates came in at an average of 1.704 bb. However, the high end of 2.072 bb and low end near 1.21 bb could easily be in play depending on how USDA sets up its supply-and-demand table. Given the March 30 prospective plantings number of 95.9 million acres and USDA’s trendline yield of 164 bpa and adding in possible carryover stocks of 760 mb, total supplies could be estimated at just over 15 bb. It all comes down to demand. If demand sees trendline growth to 13.9 bb, ending stocks stay relatively tight near 1.2 bb. If demand slows, the case could be made for ending stocks in the 1.6 bb to 1.7 bb range. Either way the deciding factor will be the calculated ending stocks-to-use figure, and the higher this number grows the more bearish the initial look at 2012-2013 becomes.
Soybeans: It seems inevitable that 2012-2013 ending stocks and ending stocks-to-use for soybeans will be bullish. If USDA sticks with its prospective plantings number of 73.9 million acres, trendline yield of 44 bpa, and beginning stocks hold near 220 mb, total supplies could be near 3.29 bb. Demand over the last five years has averaged 3.17 bb. Subtracting one from the other could put ending stocks near 120 mb and ending stocks-to-use at 3.8{fd15d42d1b024b97d6d50958be27cc8145b6addb99e015780abccf2984117bb0}, the latter the tightest domestic situation on record. Ultimately, there is a chance acreage could be increased due to double-cropping numbers, but total demand could also go up and offset these extra supplies due to a lack of South American competition early in the marketing year.
Wheat: Despite the larger expected crop, U.S. ending stocks of wheat for 2012-2013 aren’t projected to change much. The pre-report estimate of 805 mb is near the 780 mb expected for 2011-2012. This would imply the 10{fd15d42d1b024b97d6d50958be27cc8145b6addb99e015780abccf2984117bb0} increase in production should be offset by demand, most likely by a solid increase in feed demand but also some export business.
WORLD PRODUCTION AND ENDING STOCKS
Corn: Global corn production for 2011-2012 is expected to see little change, with a possible decrease in Argentina to 20.7 million metric tons (April’s estimate was 21.5 mmt) offset by slight gains in Brazil (62.7 mmt vs. 62.0 mmt). Total demand could decline slightly, so if ending stocks are near unchanged at 867.3 mmt, ending stocks-to-use could increase slightly. Global 2012-2013 ending stocks and ending stocks-to-use are expected to come in substantially higher than 2011-2012 estimates on increased production projections.
Soybeans: 2011-2012 global soybean production could be trimmed by another 3 mmt to 4 mmt while demand is expected to increase slightly. This could lead to a test of the estimated 2007-2008 ending stocks mark of 51.6 mmt with ending stocks-to-use near the 20{fd15d42d1b024b97d6d50958be27cc8145b6addb99e015780abccf2984117bb0} level. Initial 2012-2013 estimates are expected to show an even tighter supply-and-demand situation.
Wheat: The bottom line for 2011-2012 wheat is that global ending stocks and ending stocks-to-use are expected to remain burdensome. However, 2012-2013 could show a slightly less bearish supply-and-demand situation.
THE MARKET’S VIEW
Corn: The key in reading the market’s opinion is in the action of the national average basis (old-crop price relationship between national average cash price and futures market) and new-crop futures spreads. In corn, the old-crop situation remains bullish as merchandisers continue to push the cash price higher to generate sales of supplies held in storage. This would imply that the 2011-2012 stocks situation may be tighter than USDA is willing to forecast at this time. The carry in the new-crop futures spreads is neutral to bearish, but not to the level of some of the worst-case scenarios being built into pre-report projections.
Soybeans: As with corn, national average soybean basis remains firm, indicating continued strong demand. However, old-crop soybeans are not as bullish as corn, indicating that the pre-report estimate of only a modest trimming of ending stocks would be in-line with market signals. The new-crop situation is far different with the strong inverse in the forward curve (series of futures spreads) reflecting the market’s opinion that supply and demand could be extremely tight.
Wheat: With only a few weeks left in the marketing year, most of the attention in wheat has turned to new crop. There we see futures spreads for both winter wheat markets in a strong carry situation, indicating an ongoing bearish supply-and-demand outlook. The new-crop spring wheat forward curve doesn’t show the same strong carry, implying less bearish long-term fundamentals.
Editor’s note: Join DTN Senior Analyst Darin Newsom at 8:30 a.m. CDT on Thursday for a discussion on the latest USDA reports and what the numbers might mean for the markets going forward. Sign up now at: www.dtnpf.com/promo/webinars.
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Posted with DTN Permission by Haylie Shipp
