Wednesday, January 18, 2012

USDA predicts bin busting wheat stocks

Last week the USDA released their updated world agricultural supply and demand report, which surprised many market participants. US corn (barometer of global grain prices) production was surprisingly revised higher, while feed wheat demand was revised lower. Surprisingly given the high numbers of cattle and pigs on feed, maybe more feedlots are chasing distiller’s dry grain? Only conservative cuts (as was expected) were made to Sth American corn production. Further downgrades are likely, but it is worth noting that current forecasts are still records!  This provided a sharp drop in the futures market whilst dryness in South American lost its drive as weather forecasts projected some useful rain, which consequently removed nearby price support.

Global wheat stocks were revised higher +2.5mmt (691.5mmt), this is 40mmt higher then last year. Australian wheat crop was left unchanged at a record 28.3mmt. World ending stocks were pegged at 210mmt, +1.5mmt from last month and again surpassing pundit’s expectations. Even though USDA bumped up US exports by 680kt (25.8mmt) sluggish export news continues to weigh in on the markets ability to rally alone.

With Black Sea origin grain exports slowing, expect more aggressive Argi, Aussie and Canadian wheat filling the void. After dominating export sales (and depressing world prices) in the second half of 2011, Russian origin wheat is getting more expensive as the trade hunts further inland to secure supplies.

Dryness is still reported across the US southern Plains but will have minimal impact on the market until later in February as the winter crop starts to emerge from snow cover and commence to green up. Dryness in Ukraine is also raising a few eyebrows, with some pundits pointing to a wheat crop of only 12mmt (down from 22mmt last year). Due to dry conditions that have been in place since July, not all winter wheat has been planted/germinated. However lower yielding spring barley/wheat or corn can still be planted when paddocks thaws out in a couple of months. But like the States actual crop prospects will not be fully known until late winter- early spring.

Wheat continues to be priced into global feed markets with domestic feed wheat working into Asian markets at about a $60/t discount to US corn. With the way the market is going, current feed values could look awfully cheap in a couple of months or US corn too expensive.

Last week, we mentioned how dry conditions were severely impacting on corn and soybean yields in Sth America (particular in Argentina). Well heavy rain fell throughout all key-growing regions of Argentina, with blanket coverage of 50mm, with some regions having 100mm. The rain also bought a cool change with temps hovering around 27˚C. Better than expected rain event for Argentina helped drive the market lower. Unlike corn where damage could be irreversible, later planted beans yields can still bounce back. That is if the weather turns friendlier for mid-January through mid-February. Frequent showers and thunderstorms have slowed growth rates in central Brazilian growing regions and much of this region will continue to see frequent thunderstorm activity during the next two weeks that will continue to slow crop development rates. 

A drier forecast for the coming weekend could be seen as a positive force going forward. While the forecast is still drier, scattered rain coverage between 8 – 31mm is expected in Argentina. This lack of more than two major rain events in Argentina in the next few weeks has helped to provide underlying support as the rain amount trends could continue to decline into February.

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