Is Grain Rally Sustainable?
Jan 13, 2013
Grain futures continued their positive response in the overnight session after USDA’s supply and demand data on Friday helped shift sentiment on the state of the markets. Soybeans led the charge higher overnight posting a 20-cent advance, while wheat and corn prices were up 16 and 14 cents, respectively.
Friday’s USDA corn forecast was probably the biggest shock to the market, as traders were surprised by the high level of feed use in corn for the first quarter of the marketing year. As a result, domestic ending stocks fell to 602 mb from the previous reported forecast of 647 mb and a trade expectation of 667 mb. The lower than expected stocks highlight the ongoing tight stock situation, and should help lift futures back to the mid $7 level in the near term. Furthermore we think $8 could be attainable as long as livestock numbers continue to show few signs of softening. Broiler production continues to run at or above last year’s total while the dairy cow inventory and pig inventory remained nearly unchanged from last year. Only cattle on feed seem to be showing any signs of seriously cutting back with the latest numbers showing a 6% drop in cattle on feed numbers.
In the wheat market, traders were surprised by lower than expected winter wheat seedings. The USDA pegged winter wheat seedings at 41.8m acres, 867,000 acres fewer than investors had expected. In light of terrible growing conditions in much of the Plains, we would expect actual wheat acres to fall more as abandonment becomes a serious option this spring. USDA made only a minor adjustment to the domestic balance sheet, raising feed use slightly and the world wheat stock-to-use ratio continues to exceed 26% which is a reasonably comfortable number. However, we think there is still room for upside movement in wheat prices as drought conditions in the plains take center stage in the coming months.
For soybeans, higher domestic crush helped offset some of the higher production that USDA penciled in for the balance sheet, as the net result was a slightly higher ending stocks number of 135 mb. Still, they left exports unchanged even with a blistering pace in sales and shipments so far this year. In the near-term look for front-month March futures to reclaim $14 with a good shot at the $14.30 area. But, with what looks to be a record large South American soybean crop on the horizon, it may be a tough chore for soybean prices to sustain those levels into the spring.