West Kentucky Grain Market Project
Monthly Market Update for May 2007
May 16, 2007
The USDA's May World Agricultural Supply and Demand Estimates (WASDE) report was supportive of prices for the l onger term outlook. Wheat prices were supported by the estimate of world ending stocks at the end of the 2007/08 marketing year dropping to only 113.4 million metric tons (mmt). This compares to the current figure of 120.4 mmt for the about to end 2006/07 marketing year and 148.6 mmt for the 2005/06 marketing year. The 113.4 mmt projected ending stock figure for the new marketing year is the smallest level of world wheat carryover supplies since the 1981/82 season and the smallest relative to use since at least 1960. U.S. wheat supplies are projected to increase relative to the very tight supply/demand balance of the 2006/07 year but ending stocks are expected to stay quite small relative to use and to historical levels. This situation should support wheat prices very well for at least another 6-12 months as production potential remains uncertain.
In contrast to wheat, U.S. and global supplies and projected ending stocks of soybeans are record large for the marketing year that will conclude at the end of August. However, the May WASDE was supportive of prices in the longer term due to the rapid expansion at the U.S. and global level in the use of soybeans and corn to produce fuel. USDA’s projections portray robust expansion in the use of soybean oil to produce soy-diesel and their data reflect the fight for acres for energy versus food/feed production.
This latter situation is well represented in the U.S. corn "Balance Sheet" for the upcoming 2007/08 corn marketing year that will officially begin September 1, 2007. Even with the tremendous increase projected in planted and harvested U.S. corn acres (up 12+ percent from last year – with much of the acreage coming out of soybeans) carryover stocks August 31, 2008 are projected to remain flat at only 947 million bushels compared to this year's 937 million bushel projection. If this projection turns out to be reasonably accurate stocks relative to use would be under 8 percent, tighter than the current year's projected stocks/use ratio of 8.1 percent, and the second tightest on record exceeded only by the 5 percent stocks/use ration from the 1995/96 marketing year.
For soybeans the massive loss of acres to corn coupled with expected strong growth in soy- diesel production and continuing robust domestic and export demand provide the basis for USDA to project a sharp drop in 2007/08 soybean ending stocks from this season's record large level.
The foregoing paints a very positive picture for price expectations, yet the corn market is down significantly from it's February high of $4.295 for the December 2007 Chicago Board of Trade (CBOT) futures contract. Soybean prices have declined less sharply, especially in percentage terms, due to the perceived tightening of the supply/demand balance in the future, while wheat has bounced back on scattered global production problems and consequent very tight projected stocks/use ratio.
It is only mid May and some grain analysts believe corn yield will be well above the USDA's first estimate of 150.3 bushels per acre that was forecast in the May WASDE. Other analyst mention that the weekly export pace has been disappointing and USDA has lowered their forecast of total exports for the 2006/07 season and due to continued poor weekly exports rates USDA will eventually lower the annual projection further which will increase carryover stocks and add to next year's supply. These market analysts speculate that as long as the weather cooperates prices have done their job – use in the current year is being curtailed and plantings have increased dramatically.
The stage is now set for an exciting growing season. What is a farmer to do?
Marketing decisions will be unique for each farmer. What, if anything, has been do so far? How much on-farm storage exist and how much of the grain must leave the farm at harvest are also important considerations in decision making.
One other item from the May WASDE might be helpful to farmers as they contemplate their individual situations. USDA projects the 2007/08 season's average farm price for the entire U.S. corn crop to end somewhere between $3.10 to as high as $3.70 per bushel. This wide range is due to the huge degree of uncertainty about first, crop size and second eventual consumption. However, there is a strong chance that prices will turn out to fall somewhere within this range.
One strategy would be to price corn at $3.70 or better – odds are high this will turn out to have been a prudent action. It is likely that the midpoint of the range, $3.40, is also a good target for sales. Farmers in Kentucky should add about 12-15 cents to these numbers to account for the Kentucky price usually averaging that much above the nation average price.
For soybeans the USDA projected season's average price range for 2007/08 is currently pegged at $6.50 to $7.50 while the wheat price range for 2007-08 is at $4.35 to $4.95 per bushel.
It is unlikely to be a perfect growing season for corn and soybeans – the spring planting season has not been ideal and Kentucky wheat producers will long remember Easter of 2007 with dread. There should be much price volatility ahead. As mentioned countless times in this Column this is an ideal environment to obtain downside price protection and leave the upside open.
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.