Lower Grain Stocks Are Becoming More Comfortable – Or Are They?

Published on: 12:45PM Apr 01, 2013

The market’s reaction to last week’s USDA acreage report was bearish, not from the projected acres to be planted but from the Quarterly Stocks report.

Spring flush is upon us. Now, that can mean different things to different people.

For a bottler and manufacturer, it means increasing milk receipts. Manufacturing time will need to be increased and, in some cases, milk will have to be diverted to other facilities willing to take it on. To sweeten the pot, milk is offered at a discount when supply is plentiful. Pricing varies throughout the country as some regions are able to handle current milk supply easily while other regions are seeing strong milk receipts.

Cheese and butter manufacturers are mixed as to the interest in purchasing extra milk. Cheese and butter prices give the indication there is limited downside price risk and therefore increasing the desire to produce more product. However, the outlook for a choppy market with limited upside price potential for the near-term keeps others cautious over extra production.

For farmers, increasing milk production means a greater milk check. More income is always better. However, that is coming with a cost. The March milk/feed ratio of 1.47 is not helping profitability. In fact, the milk feed ratio has been below 2.00 since April 2011. This has been the demise of some farms while many others are just hanging on. This year will be critical.

USDA released its "Prospective Plantings" report last week, which was considered neutral to bullish with the estimate of 97.28 million acres of corn and 77.13 million acres of soybeans expected to be planted. Gone for now are the previous predictions of 99.0 million acres of corn and $4.00 per bushel.

Prices will be hard pressed to decline to that level unless weather is ideal this summer (which is highly unlikely). Current long-term weather forecasts indicate a strong potential for continued drought in the South and Great Plains stretching up into the Dakotas. Now, this may be a smaller area than last year as more moisture has been seen in some areas, reducing the various drought areas on the Drought Monitor map. One can only hope a repeat of last year will not be seen or grain stocks will fall lower again.

The reaction of the market to the acreage report was bearish, not from the projected acres to be planted but from the "Quarterly Stocks" report that was also released at the same time. Old-crop corn futures being pushed limit down put spillover pressure on new-crop corn futures. Much of this knee-jerk reaction stems from where actual numbers fall, according to analysts’ estimates.

Quarterly stocks of corn were above analysts’ estimates but should not have caused May and July futures to decline as much as they had. Strong cash prices going into the report indicated a premium was being paid to obtain supply, and that certainly is not going to change because of stocks being higher than anticipated. Corn stocks are 624.0 million bushels less than the same time last year. Current estimated ending stocks are 632 million bushes compared to 989 million bushes last year.

So, it would seem to be a comfort that quarterly stocks are not falling as some predicted and knowing that the market is doing its job. Potential ending stocks as low as they are predicted, combined with another growing season just beginning and weather already looking to not be optimal, should cause great concern.

Declining grain prices that resulted from this report are a gift and should be taken advantage of. Those who had already purchased call options and call option spreads earlier need to roll them down to lower levels. Those who have not protected feed prices for the rest of this year and next need to step up and purchase call options. The growing season is ahead, and protecting feed prices in case a repeat of last year is experienced could mean the difference between staying in business or being forced out.

Upcoming reports:

- Global Dairy Trade auction on April 2
- March Federal Order prices announced on April 3
- February Dairy Products report on April 4
- World Agricultural Supply and Demand report on April 10

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through his website.

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