Where Do We Go From Here...?
Aug 11, 2010
Obviously a slightly higher dollar, lower crude oil and a weakening economic outlook have all pressured the grain markets the past few days. Things should certainly heat back up after we adjust to one of the largest USDA Grain Reports of the year tomorrow.
WHEAT has obviously been the lead story as of late as importers around the globe scramble to replace lost Russian supplies. Governments are doing a good job of assuring the markets and their own populations that supplies are adequate for the time being. US Agriculture Secretary Vilsack commented yesterday that US and world supplies are adequate to replace the lost demand from Russia. The fear now has to be that Russia may pressure other exporters in the Black Sea region to institute a ban on grain exports. This would be aimed primarily at neighboring Kazakhstan, who is expected to export close to 8 million tonnes of wheat this year, making it the world's 6th largest wheat exporter. Russia could make this move in order to help them control wheat price within their borders and keep a lid on inflation. The market will learn a lot more in the coming weeks as there is still a great deal of uncertainty over how big the losses from the Russian drought really are, but if others begin to halt exports rest assured price will once again start to rally.
SOYBEAN traders continue to focus on weather concerns and increasing demand. With beans heading through their critical pod-filling stage many traders are concerned that too much heat could lower yields. Currently we feel sub-soil moisture levels and rain in the forecast will be enough to carry beans through this critical stage.
CORN traders are a little worried that we may see a slight increase in yield on tomorrow's Crop Production report. There is also some concern that the recent poor economic data from China could trim the potential for gains in export sales during the coming year. Something to think about though is how the loss of feed wheat exports from the Black Sea region could lead to a significant increase in US export sales.
USDA CROP PRODUCTION / SUPPLY DEMAND REPORT: Below is a summary of what we are hearing as the most recent trade guesses.
Corn: 2010/11 U.S. corn yield is pegged at 164.1bpa with a range from 162-167.4bpa. Last month’s yield was 163.5bpa and last year was 164.7bpa. Corn production is pegged at 13.282 bil. bu. with a range from 13.120-13.524. Last month’s estimate was 13.245 bil. bu. and last year was 13.110 bil. bu. New crop corn carryout is pegged at 1.307 bil. bu. with a range from 970-1.535. Last month’s estimate was 1.373 bil. bu. 2009/10 U.S. corn carryout is pegged at 1.459 bil. bu. with a range from 1.390-1.523. Last month’s estimate was 1.478 bil. bu. and last year was 1.673 bil. bu.
Soybeans: 2010/11 U.S. soybean yield is pegged at 43.2bpa with a range from 42.0-44.0. Last month’s yield was 42.9 and last year was 44.0. Soybean production is pegged at 3.366 bil. bu. with a range from 3.290-3.432. Last month’s estimate was 3.345 bil. bu. and last year was 3.359 bil. bu. New crop soybean carryout is pegged at 334 mil. bu. with a range from 275-404. Last month’s estimate was 360 mil. bu. 2009/10 U.S. Soybean carryout is pegged at 166 mil. bu. with a range from 153-181. Last month’s estimate was 175 mil. bu. and last year was 138 mil. bu.
Wheat: Analysts expect the USDA to increase its US all-wheat production estimate tomorrow by about 15 million bushels from 2.216 billion on its July report. This is due improved conditions for spring and durum wheat. 2010/11 U.S. wheat carryout is pegged at 982 mil. bu. with a range from 800-1.132. Last month’s estimate was 1.093 bil. bu.
* It should be noted that the July USDA number was mainly a trend yield (statistical) forecast while the August estimate will be the result of a major field survey.
MY THOUGHTS: If history holds true you are more than likely to see the USDA get aggressive with tomorrows corn yields compared to the average trade guess and do just the opposite with soybean yields. This is not to say we will end the season at these levels. In fact it is my belief that we may see just the opposite as we move forward. I think there is a very good chance that we will see corn yields fall from the levels reported in tomorrow's report and beans yields actually climb in the coming months. I think the corn crop may be struggling with the high heat and humidity more than people think, where as soybeans being a much more tropical crop will fair much better in the long run than most believe.
It will certainly be tricky in the months ahead trying to forecast corn yields with such variables from farm to farm and region to region this year. Certainly one has to believe that excessive heat and humidity has taken some type of toll on the overall grain yield, but the extent of the loss is unknown at this point because of the host of interacting factors affecting actual kernel growth. Corn development is well ahead of normal, and these high temperatures will force an early maturity and an early harvest. Had a drought occurred, grain yield reductions might have been more severe than those from excessive heat and humidity. However, just because we have avoided drought in 2010 does not guarantee above trend-line yields. Too much heat and too much humidity can be very tough on corn and I believe we will start to see yields trimmed back during the coming months.
I think the knee jerk reaction of the market on the USDA yield numbers will send the market lower, as yields start to falter and demand continues to strong I believe longer term market direction is higher. How much higher obviously is the magic questions. Prices will obviously hinge on China's continued demand, the severity of Russia's drought, the strength of the US Dollar and how far this years yields will be reduced.
I like having a floor in place, and look short term for the market to move lower. From there we have hedge strategies in place to advantage of the higher moves as the market begins to turn.
I personally think the USDA will shock the bean market a bit by underestimating the soybean yield, and beans may actually pull the other markets higher short term. I think the market will readjust in the coming weeks as more rain and cooler temps start to enter the forecasts. Bean yields will eventually start being raised higher and the market will adjust accordingly. The one wild card right now in the bean market though is gang buster demand. I recently read a report that stated 1 out of every 4 rows of beans in the US is exported to China...an amazing number. China's demand does not look to be slowing down anytime soon and their consumption of meal and oil continue to be on the rise. To make a long story short I think we rally the beans higher after the report. In the coming weeks I believe we will see them pull back, only to rally again in the future as demand continues to be a significant driving force.