West Kentucky Grain Market Project
Monthly Market Update for February 2005
February 16, 2005
In many ways the 2004/05 marketing year fundamentals for grains is axiomatic -- "widely accepted as self evident". Global production of corn and wheat in 2004 was phenomenal, with corn production up nearly 13 percent and wheat production up more than 12 percent from the prior year. Both crops were record large and resulting low prices allowed use to expand to record levels while still building carryover stocks for future consumption. Current estimates of the size of the South American soybean crop that is now being harvested also indicate a new record production from that continent and when added to the record crop harvested in the U.S. last fall provides the world with a new record total soybean supply (up 20percent over last year's production) for the 2004-2005 world soybean marketing year.
Even though much appears to be known about supply-demand conditions for the 2004-05 grain marketing year and therefore likely remaining price action, the uncertainty surrounding the current Brazilian soybean crop and the pace of use for crops in the U.S. remain important variables that could impact price direction. The recent recovery in soybean prices has been largely attributed to large trading funds trying to protect the sizeable “paper profits” they have accumulated over the past several weeks as growing conditions in Brazil looked perfect and prices weakened. Additionally, growing conditions in Southern Brazil and to some degree in Argentina have been hot and dry over the last several days -- during a very critical period of yield determination. USDA lowered their estimate of Brazilian soybean production by 1.5 million metric tons (mmt) -- about 55 million bushels, in their February reports.
The market now needs more actual harvest data to judge the impact of the recent weather events on South American soybean production. Current opinion seems to be that yield losses are modest and that Brazil will end up harvesting a crop somewhat in excess of 60 mmt which would be a very large increase over record production from the past two years of 52 and 52.6 mmt, respectively. A crop size anywhere close to the current estimate would allow world consumption of soybeans to grow by 10-15 mmt and still provide an additional 20 plus mmt of soybeans to be added to global carryover supplies for future consumption.
It is this sobering realization that should restrain the market from much additional strength. It will take a more serious problem than the current situation appears to be to generate much more recovery. In fact, if the damage is slight there could yet be one more retest of the lows from early February.
The other factor that is providing some support to the soybean and wheat market and some drag on the corn market is the weekly and cumulative export rates (both sales and shipment data) for U.S. produced grains and products. The U.S. is about 75 percent of the way through the 2004-05 wheat marketing year which ends May 31, 2005. The export data provide reason to believe that total annual wheat exports could be somewhat larger than the current estimate of 1.025 billion bushels. As mentioned above, global wheat supplies are record large and are providing competition for U.S. wheat, however, much of the global supplies are of poor quality and are going into the global feed market as stiff competition for U.S. corn. This presents an opportunity for the U.S. to sell high quality food grade wheat to the world market.
If weekly U.S. wheat export sales and shipment data remain robust over the next several weeks and the market can get past a seasonal bottom in the "old-crop" corn and soybean markets it seems likely that price could improve slightly compared to current levels for "new-crop" wheat. Kentucky producers need to monitor this market closely and be ready to take action on pricing at least some of their expected 2005 production soon.
Because of the tremendous U.S. and global supplies of corn and soybeans the price outlook for "old-crop" supplies still owned by farmers is not bright. The only short-run reason for prices to rally would be the Brazilian soybean crop as discussed above.
This record large supply of grain means the market focus will soon shift to prospects for grain production this spring in the northern hemisphere. The "good news" side of these large supplies is the record setting pace of consumption that has been stimulated. In the U.S., feed demand and energy demand for U.S. crops looks very robust. At the global level, China -- as they have been for the last several years will be the key player.
Crop production prospects, as always, will be paramount in future price action. The advent of Asian Soybean Rust (ASR) in the U.S. only adds another dimension of uncertainty to this difficult task that market participants must assess. The possible market outcomes are endless. This degree of uncertainty makes it imperative for farmers to try and obtain prices above their county marketing assistance loan rates if and when they become available and yet retain the possibility of garnering a better net price if something happens to damage production prospects, i.e. weather or ASR or some other threat.
For More Information
The West Kentucky Grain Marketing Project: Monthly Market Update is edited by Steve Riggins. You may contact him by e-mail at sriggins@uky.edu.