Monday, February 27, 2012

The road to 2012 prices

Last week the USDA had their annual outlook conference, sharing thoughts on the marking year ahead (June – May). Grain futures largely shrugged off bearish crop acreage estimates focusing more on short-term bullish fundamentals on increased export demand and general weather uncertainty. All wheat acreage was pegged at 58ma, this was 1.5ma higher then the market expected and +6.6% compared to last year. Spring wheat acreage is set to ounce back after back-to-back wet springs. MGEX declined 35.75c last week; compared to neighboring CBOT that was only down 3c.

US corn acreage was pegged at 94ma (as expected), +2.3% from last year and the biggest planted area since 1944. 12/13 ending stocks forecast at 41mmt vs 20mmt this year and stocks/usage jumps to 12% from 6.3% this season.  Anticipated large acreage continues to limit strong advances.  Assuming baseline yield of 164bpa, production could hit a record high of 354mmt (assuming 8% abandonment). However yields over the last two years has been sharply lower then baseline. And combined with a lot more corn being planted in non-traditional regions, this may drag on overall final yield. Also another factor that needs to be raised is the GM seed debate, and if yield upside has been reached? Nonetheless current numbers are bearish, but at the end of the day are still just numbers. Mother Nature as always will have the final say.

Although old crop corn supply is tight, weakening ethanol margins and a firming basis may help to conserve corn before new crop comes off in September. Corn demand from the ethanol sector is seen falling in 2012/13 which would lead to a very sharp rebound in ending stocks in an average growing season.  However with crude oil knocking on the door at $110 barrel, may be some source of comfort. This may lead to improving margins for the ethanol market, at a time when it needs it most, with the blenders' tax credit now up in smoke.

New season US soybean acreage was pegged at 75ma, which is similar to last year. While the bullish aspect is that US ending stocks (12/13) tightening to just 5.8mmt (-1.7mmt from 11/12). US export demand will remain strong well into the 2012/13 season due to tightening supply from Sth America, suggesting the lower anticipated ending US ending stocks.  Confirming the bullish sentiment to US exports was echoed in last week’s weekly sales at 4.03mmt (1.16mmt old and 2.87mmt new crop). Only 223kt of old crop sales are needed to reach the USDA target (35mmt) for the 11/12 marketing year. China has been much more aggressive in the export market recently, which is a good indication that USDA is too low with the old crop export estimate and that only adds to the bullish set up of the new crop.

Domestically, new crop wheat prices have remained relatively subdued since December, with east coast prices averaging $230 ($248 FIS WA). However new crop basis is -$15/t compared to +$50 this time last year.  The biggest bolter and more attractive price option has been  canola that has rallied $35/t since the end of Jan in WA, while on the east coast prices have rallied $25. However the full upside of both Matif rapeseed and Winnipeg futures hasn't been price in, resulting in declining basis. The wet summer in northern cropping regions and this week’s slow moving cold front over northern Victoria/NSW have got conditions looking cheery ripe for the winter cropping prospects. Whilst most over regions have experienced the usual dry summer.

As always 12/13 prices will be heavily impacted by Northern Hemisphere weather, with March critical for yield outlook for winter wheat and sowing prospects for corn/beans. Although a smooth sailing growing season is rare, it may happen. If there are decent yields we will be buried in grain (particular wheat), even if we have a poor yields there will still be plenty of wheat particularly in Australia after having back to back record crops. These scenarios should be considered when setting new crop pricing ideas.

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