Friday, August 12, 2011
Crop Report Shows Tight Supplies
For a few hours today the commodity market diverted its attention away from global financial issues to trade the fundamentals of supply and demand for the grain market. USDA’s August 1 crop report surprised the market, and prices closed strongly higher, with corn being locked up the 30 cent (soon to be 40-cent) daily trading limit. And there were a lot of reasons to refocus on grain market fundamentals.
Anticipating a 155 national average corn yield, the market was surprised with a 153 bu. estimate from the National Agricultural Statistics Service, which cut 5.7 bushels from its July estimate. Harvested acreage is projected at 84.4 million, a slight drop from June’s Planted Acreage report, but still enough to make a 12.914 billion bushel crop.
USDA’s production forecast of 12.9 bil. bu. production contrasts with its demand estimate of 13.1 bil. bu. The result is a carryout in August 2012 that will drop to 714 million bushels, which is less than a 20 day domestic supply. It is the second tightest in 75 years, and globally the lower production and increased use leaves a 48 day supply, which is the tightest since 1973.
Supplies are projected to remain tight through the next crop year, which ends Aug. 31, 2012. To balance supply with demand, USDA’s Supply-Demand Report cut 340 million bushels from the demand, and that includes 150 million bushels less for feed, 50 million bushels less for ethanol refining and 150 million bushels less for exports. With the stocks to use ratio at 5.4%, the average price was pushed 70¢ higher on both ends of the price range, which was re-set to $6.20 to$7.20.
The question remains if prices will push into the record levels of over $8. One side says no, because high prices will ration the demand, and the carryout will slowly recover as less corn is used for feed, fuel, and exports. However, the other side says it will top $8 because the alternative is to use sorghum for feed and ethanol, but USDA projected a 20% cut in production of sorghum.
The soybean market also enjoyed a significant surge upward, after USDA cut its national average yield estimate to 41.4 bushels per acre, down from 43.4 bushels last month. Production estimates of 3.056 billion bushel were lowered from July, due to both estimated yield decreases and lower harvested acreage. Harvested acreage is now estimated at 73.8 million acres, down 2.8 million from last year, but down less than 1% from the June planted acreage estimate.
To balance supply and demand, prices must dampen domestic use, while reducing exports. USDA estimated exports for the 2012 marketing year at 1.4 billion bushels, down about 100 million bushels from the last 2 years. But China wants and needs soybeans, is suffering from double digit food inflation rates. China purchased nearly two-thirds of our soybean exports during the current year, and exporters will find it hard to tell them no. China also planted fewer soybeans this year to focus on other crops.
The August 1 crop report has always been a bit early to make a good projection of soybean yields, since the weather over the next month will primarily determine yields. Subsequently, the 41.4 bushel crop estimate could easily fluctuate.
USDA’s effort to make ends meet on the soybean balance sheet pushed carryout down to 155 million next August. The estimated average price for soybeans, which is 50 cents more than USDA’s July estimate and ranges from $12.50 to $14.50, will push Brazilian farmers to produce another record crop in 2012.
Summary:
The August Crop report forecast lower corn and soybean production than anticipated by the market, cutting corn production by over a half billion bushels from the July estimate and beans by a quarter billion bushels. Analysts say rationing may keep corn prices under $8, but other say alternatives, such as sorghum, are also in short supply, and prices will continue to climb. Corn demand will exceed the production, and USDA lowered the carryout for corn, as well as beans, to near pipeline levels.
Posted by Stu Ellis on 08/12 at 12:00 AM | Permalink
Comments
Posted by: Jib at August 15, 2011 4:04PM
Little Jersey Bull
A Jersey bull knocked Grandpa to the ground. The onlookers were confused on what to do. Grandpa reportedly shouted; “Let the *^%# Bull Run!” I guess his words are also appropriate for the corn market; Let it Run! One already knows, like a Jersey bull, the market can/could quickly change directions and take one out. This is a weather market driven by the August yield estimate. If one’s marketing plan is to hold because small crops get smaller, one may want to review that strategy (at least after the September report). When the August estimate is between 93.7% and 99.7% of US trend line yield (our data includes 13 out of the last 36 years) 77% of the time September’s yield estimate was below the August estimate. That August estimate was over the January estimate only 38% of the time. So somewhere/somehow the crop gets better.
Run you *^%# Jersey bull!