WASDE Review
The release of the February World Agricultural Supply and Demand Estimates (WASDE) last Thursday prompted less market reaction than the release of the January WASDE report. Recall that last month’s report garnered a limit down move that was subsequently followed by a nearly 100% price retracement. Because final corn production numbers are issued in the January report, USDA didn’t change 2011/12 acreage or yield estimates. It did, however, increase U.S. corn imports by 5 million bushels. This small supply increase was more than offset by a 50 million bushel increase in exports, reflecting improved export sales in the past month. No changes were made to the rest of the domestic balance sheet (i.e., feed, food, seed, and industrial uses). Thus, 2011/12 corn ending stocks dropped by 45 million bushels from last month’s estimate to 801 million bushels. This is only 4 million bushels more than the average pre-release expectation and well within analysts’ range of estimates. These changes tightened the domestic ending stocks-to-use (STU) ratio from 6.7% to 6.3%. Despite the smaller STU ratio, USDA left the projected marketing year average farm price unchanged at $6.20/bu, but tightened the price range by $0.10/bu on both the upper and lower end.
On the domestic soybean balance sheet, USDA made no changes from its January estimates in this month’s WASDE report. Thus, 2011/12 ending stocks remained at 275 million bushels, which was about 6 million bushels more than the average pre-release estimate, but well within the range of estimates. USDA also left its marketing year average price forecast unchanged at $11.70/bu, but, like corn, tightened the price range by $0.15/bu on both the upper and lower end.
USDA raised U.S. wheat exports for the 2011/12 marketing year by 25 million bushels in last week’s WASDE report, reflecting stronger-than-expected export sales and competitively priced feeding wheat. USDA did increase its marketing year average price by $0.10/bu to $7.30/bu.
The February WASDE report was probably most watched for changes to world production forecasts. Consistent with the dry and hot conditions in late December through mid-January (corn pollination time in Argentina), USDA lowered Argentine corn production by 4 million metric tons (mmt) to 22 mmt. Although corn production was not lowered in Brazil since last month’s estimate, USDA did report a 0.4 mmt decline in nearby Paraguay’s corn production. Brazilian and Argentine soybean production was lowered by 2 mmt and 2.5 mmt, respectively, since the January forecast. Uruguayan and Paraguayan soybean production was also lowered. The lower South American soybean production reflects the impacts of the hot and dry conditions on early plant development and lower yield potential.
Overall, the February WASDE report wasn’t a short- or long-run ‘game-changer’ like some reports have been. Essentially, it underscored expectations for improved corn and wheat exports and lower corn and soybean production in South America. For the most part, the numbers in the report were close to expectations. On Thursday, following the report’s release, corn futures ended up closing 5-6 cents lower and soybeans closed 4 cents lower, after trading in a fairly wide trading range throughout the day’s session. On Friday, corn and soybeans extended those loses by another $0.08 and $0.04/bu, respectively. Despite the relatively neutral numbers for corn and soybeans, the markets’ weakness was triggered by a somewhat unexpected increase in world wheat production.
While the grain market will continue to trade the drought-related production risk in South America and the lack of country movement of grain in the Midwest U.S. in the upcoming weeks, now the focus will shift to 2012/13 production. On February 23-24, 2012, USDA will host its annual Agricultural Outlook Forum. As part of that event, USDA economists will release their first estimates for yield and planted acreage for the 2012 spring crops. Typically, the yield forecasts reflect long-term trendline yield estimates. The planted acreage forecasts are offered before the key survey data are collected and made available in the March 31 Planting Intentions report. Based on previous years’ corn yields, a trendline yield forecast for 2012 will be in the 160-162 bu/acre range. Many current industry forecasts call for about 94.2 million acres of corn to be planted in 2012, which is 2.3 million more acres than last year. Should these forecasts materialize into reality and assuming typical acreage disappearance, U.S. corn production would top 13.8 billion bushels.
With declining livestock numbers and unprofitable ethanol plants unlikely to substantially increase domestic use, it is hard to envision such a production scenario not dramatically increasing 2012/13 ending stocks and the STU ratio. USDA’s official supply and demand forecasts for the 2012/13 marketing year will be available in the May WASDE report. Depending upon those numbers, prices could well be lower by summer and fall this calendar year. Of course, poor planting and growing weather this spring and summer could reverse that quickly. The point is this: before the market sees some of those weather items that could initiate a bull market for the 2012/13 marketing year, it is fairly likely to get some bearish news (over the next couple of months). Depending upon the magnitude of such bearish information, old crop corn prices will find significant pressure as well – especially if farmer selling increases, as it is adapt to in April and May as farmers work to finance inputs for the 2012 crop. Thus, the next couple weeks might be an attractive time to consider sales of both old crop and new crop corn.
The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.