The Coming Global Surplus

Published on: 16:21PM May 10, 2013


Market Watch with Alan Brugler

May 10, 2013

The Coming Global Surplus


The main message from the USDA reports on Friday was abundance. Forecasts for feed grains  and oilseeds foresee significant expansion of global ending stocks surpluses if current weather forecasts prove accurate. That is a pretty big "if" as we learned in 2012, but it probably isn’t wise to bet the farm on yet another crop disaster. As they say "Hope makes a lousy marketing plan". USDA did confirm continued tightness in old crop corn and soybean inventories, but we’ll have to wait until the end of June to put a more precise point on that tightness. Cash basis levels are showing something, but there is debate in the industry whether it is farmer stubbornness, worry about new crop, or a futures market that has too steep of a discount to cash because the spec funds are all bailing out of commodities in order to chase a record high stock market. 

Corn futures gave back 12 cents this week, or 1.7% following a 8.6% gain the previous week.  Ethanol production slowed, and weekly net export sales weren’t very good either. Most of the market focus was on the Friday morning USDA reports. USDA made only a 2 mbu. change in the old crop ending stocks, cutting exports 50 million and raising industrial use by 48 million. The new crop balance sheet was friendlier than expected, as their spring weather model adjustment (which led them to an ill fated May rise in projected yield for 2012 in the May 2012 report) for 2013 rounded down the estimated average yield to 158 bpa. Ending stocks for August 2014 are seen at 2.004 billion bushels, with a cash average price mid-point of $4.70 per bushel.

Soybeans rallied 33 cents for the week, extending a gain of 24 cents from the previous week. These were in the May contract, which expires on Tuesday. May got a boost from a strong cash soybean market that paid as much as $1.50 per bushel over July futures to pry beans from producer hands in high demand processor areas. Soybean meal was the driver, up nearly 6% for the week as fears of cash meal shortages this summer boosted delivery values. The WASDE report on Friday left all old crop fundamentals UNCH. New crop was about as the trade had expected for ending stocks, at 265 million. The route to get there was a little surprising, with USDA projecting a record high 44.5 bushels per acre average yield and record production of 3.39 billion bushels. That was offset by expectations that very low prices ($10.50/bushel cash average midpoint) would allow the US to grow both exports and crush in 2014 despite South American competition. World competition is expected to be brutal if Mother Nature fails to intervene, with global ending stocks projected to balloon to 74.96 MMT on record US and South American production only partly absorbed by global crush growth.     

Wheat futures were higher in MPLS this week, but lost ground in Chicago and KC. Slow spring wheat planting was supportive to Minneapolis futures, encouraging users to stock up on the remaining old crop HRS supplies. USDA didn’t compute a by class production estimate for durum or spring wheat, but the combined total is 571 million bushels and durum is likely to only be 75 million bushels or so. Spring white should be around 39-40 million, leaving HRS around 455 million bushels. USDA left projected old crop wheat ending stocks UNCH at 731 million bushels. New crop stocks are seen shrinking to 670 million because of a 212 mbu drop in overall production that is only partly offset by reductions in exports (100 million) and feed use (70 million).  The average cash price is seen dropping to $6.80 from $7.80 in this soon to be concluded marketing year.

Cotton gained a modest 0.35% for the week in the July contract. May futures expired at midweek. Weekly cotton export sales continue to be stout when considering the multi-decade high in global surplus stocks. The key feature is the concentration of those stocks in China. Surplus stocks ex-China are a lot tighter. USDA on Friday lowered projected US ending stocks to 4.0 million bales, with US exports up 250,000 stat bales at 13.25 million bales. World cotton ending stocks are seen growing to 92.74 million bales from 84.78 million in the current market year.















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Cattle futures lost 1.14% or $1.38 per cwt this week. That caused a lot of head scratching, as wholesale beef prices set record highs and futures were still more than $12 below their high of $132.95. June futures only need to respect cash market values when they are in deliveries, which don’t begin until mid-June. In the mean time, speculative sellers or others are free to assume that cash cattle prices and those wholesale prices will decline from current levels by June. Cash cattle trade was mostly $126-127 this week, well above the futures but at a discount to their value in the beef. As mentioned, wholesale beef prices were record high at $205.49 (Choice) on Thursday before backing off for the weekend. Choice was up 1.6% for the week. Select product was still about $5 off of its record high, but still up 0.6% for the week.

Hog futures were down 1.85% for the week. The pork carcass cutout gained $2.69/cwt or 3.00% for the week.  Weekly pork production was down 1% from the prior week, and 0.8% smaller than the same week in 2012. Some producers appeared to be focused on planting rather than marketing hogs. Average carcass weights were estimated to be equal to year ago, so slaughter was also down 1% from the prior week. USDA reported weekly pork export sales of only 9,600 MT. That was larger, but the new reporting system is clearly missing some transactions that are typically reported in the monthly Census report.  

 Market Watch

Now that the smoke has cleared from the May USDA reports, the focus goes back to planting progress, crop condition ratings and exports. USDA will have the usual Export Inspections and Crop Progress reports on Monday, and Export Sales on Thursday morning. Tuesday will mark the last trading day for May hog futures. Wednesday will feature the weekly EIA ethanol production and stocks reports. The big monthly USDA report for this week is the Cattle on Feed report scheduled for Friday afternoon.

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