Monday, May 14, 2012

USDA forecasts monster crops, but will Mother Nature deal a different hand?

The USDA on late Thursday night had their first look at anticipated 12/13 world crop production estimates. The report was essentially bullish for oilseeds, bearish for corn and neutral to negative for wheat. The record US corn is one to watch, and if the yanks pull this one off it has the potential to weigh on feed grain markets throughout most of next year. However it is still very early days yet in the growing season, and the USDA dialed in above trend yields for corn and beans. This huge acreage has to come from somewhere, and these are usually on more marginal land and more corn on corn acreage. So expect yield forecast to be lower then anticipated, even if growing season ends up being average.

Biggest surprise from old crop wheat S&D was consumption increased by 7.6mmt, as a result ending stocks were reduced to 197mmt, a far cry from the 212mmt that was originally forecast earlier this year. Looking forward to new crop (12/13), production is estimated at 677.6mmt, a drop of 17mmt as crops return to normal yields. Some of the cuts include Ukraine (13mmt, -41%), Kazakh (15mmt, -34%), Aussie (26mmt, -12%) and Argentinian (12mmt -17%). Whilst the Yanks are going to have a monster crop (62mmt +12%), Canucks (27mmt +7%) and Indians (91mmt +5%). Consumption is seen falling 7.88mmt, due to the outlook for a bumper world corn crop and subsequent corn muscling in on feed demand. Even so, at 686.5mmt the world will consume 11mmt more wheat than it produces in 2012/13, meaning that world ending stocks are seen declining by 9mmt to 188mmt. This is a stocks to use ratio of 27%, the fourth year of continuous declines, but a far cry from 20% in 2007/08.

The USDA surprisingly lifted US old crop corn stocks by 1.27mmt to 21.6mmt. Not even the most bearish analyst had forecast a rise.  Brazilian estimates were bumped up by 5mmt (with the second planted crop showing better potential), so world ending stocks increases to 127.56mmt.  Looking at new crop, and as expected the US corn crop is a record 376mmt. If this eventuates will change the entire worlds S&D fundamentals quite dramatically next season. US ending stocks will more than double to 47.8mmt, the highest since 05/06. It also means that world ending stocks will recover 24.78mmt to 152.34mmt, the highest in twelve years. Increases in production around the globe in 2012/13 are expected from Argentina (25mmt, +17%), Canada (12.6mmt, +18%), Mexico (21mmt, +11%), South Africa (13mmt, +13%) and Ukraine (24mmt, +5%).

More cuts to South American beans was expected, however further cuts are surely likely next month (especially Argentina). Originally, total South American production was pegged at 134.6mmt, it is now at 111.5mmt, a decline of 25mmt! This means most demand will fall to the USA before the next South American harvest gets underway.  Chinese imports were also increased by 1mmt to 56mmt. US exports were increased by 700kt to 35.79mmt, while a cut to ending stocks was more than expected to 5.7mmt. It gets interesting looking at 12/13 production, and although the US crop is set to rise to 87mmt (+4mmt), US ending stocks are forecast to slump to only 3.94mmt.  This will be the tightest stock to use ratio in 47 years! US exports are pegged at 41mmt, an increased of more than 5mmt at the expense of Sth American suppliers.  Chinese demand is set to further increase to 61mmt, an increase of 4mmt from 11/12.

The USDA is forecasting a world rapeseed/canola crop very similar to that of the past couple of seasons at 60.4mmt.  A sharp drop in the crop in Europe will compensate for the increased production in Canada. However increasing demand will have global ending stocks forecast at a nine year low in 2012/13. With EU rapeseed futures spiking late last month on the prospects of frost damaged output, will pressure EU processing margins later this year. The EU rapeseed crush for 2012/13 may decline 2% from the previous year to 20.9mmt. But with Ukraine exports forecast to be slashed, Aussie exports should continue to find strong premiums into the GM free EU market.

So back to Australia, and one thing that looms like a gorilla weighing on APW ability to rally strongly into 2012/13 is the forecast monster US corn crop. But in the short term the fund length in the soybean market continues to make the canola market erratic. As we saw on the weekend when the funds sell back their positions, the consequences is the market flirts with a limit down move; even in the face of fundamental sentiment! Short-term oilseed complex still looks the pick of the punch, with international demand still strong. Whilst the global economic uncertainty continues to pressure the AUD (limiting domestic price declines), as money flows back into the USD. The CBA came out today pegging short-term range of the dollar between 0.98c – 103c, a whopping 10c adjustment from their earlier forecast! You think forecasting grain futures is fraught with difficulties!

But as always, forecasts are still forecasts and it all comes down to the weather. I’m sure ‘ol mother nature has a few aces up her sleeve to deal out during the 12/13 growing season, and with global old crop stock getting tighter, it won’t take much to again ignite the futures market. But if you just dial in current conditions, forward markets don’t hold much of a positive vibe. 

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