USDA's July supply-demand estimates left two huge questions open for wheat and corn markets: What will be this year's actual harvested acreage, and how will weather affect yields on those acres?
For wheat, heavy rain and flooding in western North Dakota and eastern Montana prevented planting on many wheat acres and flooded many planted fields, noted Brian Basting, analyst with Advance Trading, in a conference call hosted by the Minneapolis Grain Exchange.
“I think that number has to be taken a bit with a grain of salt,” said Basting. Crop condition reports have been good, but he has heard that as much as 500,000 or even up to 1 million acres of wheat may have been lost to rain and floods in North Dakota and Montana.
Corn Feed Estimate Drops
For corn, the wet, cool spring in many major corn areas delayed planting, but USDA on June 30 reported planted acreage higher than the trade expected and even higher than March projections. USDA also found more corn in storage in June.
This morning, the department projected 2010-11 corn carryout at 880 million bushels, up from 730 million projected last month but below trade estimates of just over 900 million bushels.
“Given that ethanol usage and export numbers were fairly static, they made most of the adjustment in feed and residual,” noted Dan O'Brien, extension economist at Kansas State University. USDA now estimates feed and residual use of corn this year to 5 billion bushels, down 150 million from last month.
However, O'Brien noted other signs that old-crop corn is scarce: Projected ending stocks of grain sorghum tightened in supply-demand reports from 37 million bushels to 32 million last month and now 27 million, and ethanol plants in the eastern Corn Belt have started using some wheat with corn to limit their grain costs.
For 2011-12, USDA projected carryover at 870 million bushels, while the trade had expected about 1 billion.
“We're still in a very risky situation,” said O'Brien, noting that the 2011-12 projections show the ratio of stocks to use at only 6.4%. “Even with what we have, we're not projecting any substantial rebuilding of stocks.”
Durum Tight, Prices 'Dynamic'
USDA projected this year's durum production at 64 million bushels, down from 107 million last year, and projected exports down to 14 million from 35 million this year. Wheat supply-demand numbers for July were about what the trade expected, but the durum production estimate was a little lighter than the average trade estimate of 70 million bushels.
“Durum is quite tight, no question about it,” said Basting, adding that the production estimate may decline because harvested acreage may be lower than projected. “There's going to be some dynamic price action shaping up for durum values in the next year,” he said.
USDA's hard red spring projections likewise may fall in future reports because of rain and flooding on the Northern Plains, he said. USDA projects hard red spring carryout declining from 185 million bushels this year to 173 million next year, but acreage loss could trim the carryover to less than 150 million, said Basting.
“USDA is factoring in the flooding that devastated some production in Canada,” noted Basting.
USDA cut its estimate of Canada's wheat crop by 3.5 million metric tons because of heavy rain and flooding into the second half of June. The department trimmed its estimate of Canadian wheat exports by 2.5 million metric tons from last month to 16 million. Most of Canada's loss in exports went to the United States. USDA projected wheat exports at 1.15 billion bushels, or 31.3 million tons, in 2011-12 , up from last month's estimate of 1.05 billion bushels but still behind last year's 1.286 billion bushels.
Weather and Risk
“Everything now depends on weather in the next six weeks,” or into September for corn at risk of damage from early frost, said Basting. Wet soil during spring and early summer in much of the Corn Belt has led to concerns about root structure and plant stress, especially with hot weather settling over much of the Corn Belt. “This crop may be more susceptible to stress than it would be if it had a better root system,” said Basting.
O'Brien figures the chances are at least 50% that feared weather problems won't occur. “But there's a whole raft of questions and lots of uncertainty, so it's probably wise and prudent to think about prices eventually declining into harvest.”
However, he also sees a 25% to 45% prospect for prices to go higher before harvest.
“For farmers, given the potential volatility, we encourage them to think ahead as to how they would respond to either up or down scenarios,” says O'Brien.
He advises taking a portfolio approach. “Just be aware that you divide up marketing over time and use risk management tools – options or some other type of floor building mechanism.”
For More Information
See AgWeb's full July USDA report coverage.