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Take Heart: Higher Prices Could Follow Bearish Reports

11:04AM Jan 12, 2012

USDA’s crop reports released this morning held bearish surprises on corn, wheat, and soybeans, but analysts caution world grain stocks are far from burdensome on either corn or soybeans. 

After an initial sell-off caused by both producer selling and speculative liquidation of long positions, analysts expect the market focus to quickly revert to weather in the South American growing regions.

Looking at the corn numbers first, USDA pegged 2011 production at 12.358 billion bushels, up 48 million bushels from last month and 78 million bushels higher than the average trade estimate due to increases in both harvested average and yield mostly in the eastern Corn Belt.
"The numbers look quite negative against trade expectations," says Terry Roggensack, with the Hightower Report, Chicago. He was one of three analysts on a CME Group press briefing following the release of USDA’s annual Crop Production, quarterly Grain Stocks, and Winter Wheat Seedings reports. "The big surprise was the increase in yield," he notes.
USDA raised the 2011 U.S. average yield from 146.7 in November to 147.2 bushels per acre in today’s report. The 2011-12 ending stocks for corn of 846 million bushels were also well above the average trade expectation of 753 million bushels but 2 million bushels below USDA’s November estimate.
Despite the bearishness of today’s reports, analysts expect roller-coaster prices to continue. "I think we’ll see extremely volatile grain prices moving ahead over the next couple of years," says Roggensack. "You could make the case that (a large 2012-13 U.S. corn crop) will alleviate world tightness on corn." But, he says, a case could also be made for continued tightness in the world corn market.
"USDA did not address potential losses in South American corn," says Roggensack. Many analysts anticipate a loss of between 12 million and 16 million metric tons of corn this year in South America, but USDA only raised U.S. corn exports by 50 million bushels.
At the same time, though, analysts expect U.S. corn growers to plant 3 million more acres to corn this year. Coupled with an average yield, 3 million additional acres would mean U.S. corn production could increase by 50 million tons. "With normal weather in the United States this coming growing season, tightness in the word situation would be alleviated," Roggensack says.
But there’s upside potential as well. First, drought has expanded into the northern and eastern Corn Belt west of I-35. Second, if China, which has increased corn production nine years in a row, runs into bad weather that negatively impacts the size of its corn crop, world corn prices could once again soar. "And if China continues to expand (economically), it will need more milk, more cattle, and a lot more hogs," says Roggensack. "We are not in a burdensome situation (globally) in any of the grain markets with the exception of wheat."

Soybeans Bearish, Too

USDA raised soybean production from 3.046 billion bushels in November to 3.056 billion in today’s report, which is 14 million bushels more than the average trade estimate. Ending U.S. soybean stocks of 275 million bushels were also up substantially from December’s estimate of 230 million bushels. The average trade estimate called for a 2 million bushel drop in stocks to 227 million bushels.
Mitigating the bearishness, however, are weather problems in Brazil and Argentina and a slight reduction in global soybean stocks, from 248 million metric tons in November to 245 million metric tons, says Jack Scoville, with The Price Futures Group, Chicago. USDA also lowered world and domestic demand for soybeans. "Soybeans will have to head lower," says Scoville. "But the market focus will return quickly to what is happening in South America."
Recent rains provided some relief in dry crop-growing regions of South America, but substantial damage has already occurred to the continent’s corn crop. "If corn is not going to make it, some acreage could go to soybeans," Scoville adds.

Wheat Stocks Well Above Expectations

U.S. and world ending stocks for wheat came in substantially larger than expected at 870 million bushels in the United States and 681.43 million metric tons worldwide. Analysts had been expecting U.S. ending stocks of wheat of only 831 million bushels.
"There is a continued sizeable crop in wheat," says Jerry Gidel, NARMS Future Trading, Livingston, Texas. And U.S. wheat producers are expected to only add to the glut this year. USDA’s Winter Wheat Seedings report shows that U.S. producers will seed an estimated 30.1 million acres of hard red winter wheat, compared with 28.48 million acres last year, raising total wheat acres by 287,000 acres.
Despite continued severe drought in Kansas, Oklahoma, and Texas, producers there continue to add to their hard red wheat acres. "The aggressive approach U.S. wheat producers are taking will add to downward pressure in the market when we could us a little less wheat," says Gidel. "But it’s a long way until we get the wheat crop in the bin, especially in the hard red area." He suspects that some of the wheat acreage is being seeded in the hopes of getting livestock forage in a region desperately short. "Harvested acres in the Southwest might not be as strong as planted acres," he adds.
Gidel, however, isn’t ruling out a rebound in wheat prices once the initial bearishness of today’s reports gets worked into the market. "Hopefully later this winter there will be some upside," he says, particularly if dryness persists in South America and Eastern Europe. "A big event has been the dryness in Ukraine this fall, where 20 to 30 percent of this year’s seedings likely will not be harvested." Some of that acreage, however, could be seeded to lower-quality wheat. Tempering that outlook are large crops in Australia and Europe.


Complete Coverage of Jan. 12 Reports
See the data, read the biggest news and listen to analysis of today's Crop Production and WASDE reports.