Bigger stocks and lower prices for corn and wheat are ahead, based on today's Agricultural Supply and Demand Estimates.
"The overall short story is basically bearish as of the early calls," said Jonah Ford, senior analyst at Ceres Hedge, on a Minneapolis Grain Exchange conference call.
For both crops, increased production and export competition from other countries are cutting into U.S. exports. More wheat is going into feed rations in response to strong corn prices and record-high global wheat production.
Here are highlights from USDA's supply-demand report:
Wheat: Projected U.S. domestic use is steady from last month and higher than in the past two years, but exports are down 50 million bushels from last month to 925 million. Projected ending stocks for 2011-12 increased 50 million bushels from last month to 878 million bushels, compared with 862 million last year and 976 million in 2009-10.
Projected global supplies are up 9.3 million metric tons from last month because of bigger stocks in Australia and Argentina and record-high world production at 689 million tons. Wheat prices are competitive with corn prices, so wheat feeding is up in several Asian countries and Mexico.
Corn: U.S. ending stocks are up 5 million bushels from last month to 848 million, offsetting lower projected food, seed, and industrial use. Sweetener demand for corn has been slightly lower this season.
Even though the U.S. corn crop is down from last year, global production is projected at a record-high 867.5 million tons. Production is up in China, the European Union, and Canada.
USDA lowered the 2011-12 season-average price projection 30 cents from last month to $5.90 to $6.90/bu.
"Corn prices received by producers have been reported 40 to 50 cents per bushels below prevailing cash market bids reflecting apparent deliveries of grain that was forward priced below $6/bu. ahead of planting this past spring," reported USDA.
Corn, Wheat Competition Continues
Ford expects the competition between corn and wheat to continue in the short term.
"There’s been some optimism in the past couple of weeks as far as the premium," he said. "Wheat and corn have been pretty much in lockstep since fall." Prices slipped into sideways ranges for both grains. Corn and wheat prices likely will trade around par value "until we get decisive fundamental shift," said Ford.
"We had a really tight corn crop last year, and it's showing up in prices now," he said. Going into the spring Planting Intentions report, he expects corn prices to stay strong to attract acres.
International Price Balance
Jacinto Fabiosa, an international livestock analyst at Iowa State University, said changes in feed demand for wheat in place of corn tend to be short-term but can last more than a season.
"In the long run, we believe that because of the strong substitutability of these grain products, the price will not move away from each other on a sustained basis," said Fabiosa.
Volatile Outside Forces
Market volatility likely will stay closer to historical trading ranges than it did in summer.
However, Ford says, "I don’t expect it to be very quiet. We have ea lot of outside influences in grains." Traders are moving in and out of commodities to manage financial risks. "That will keep the volatility cranked up to some degree," but he expects seasonally light grain market news during winter to temper volatility.
In wheat markets, said Ford, "I expect high protein wheat (prices) to continue to hold strong." Minneapolis futures have lost some of their premium, but are still at least $2 higher than Chicago.
Although the initial calls for futures after the report were 10 to 15 cents lower for corn and 20 to 30 cent lower for wheat, Ford limited the prospects for pressure.
"I don’t expect a downward spiral," he said. "I just think we'll pull out of these record price channels."
For More Information
December WASDE Report Coverage
See all of the report numbers and analysis from today's World Agricultural Supply and Demand Estimates and Crop Production reports.