West Kentucky Grain Market Project
Monthly Market Update for September 2006
September 13, 2006
The USDA's September reports were fairly typical in that market participants accurately anticipated much of the information and yet there were a few important surprises.
USDA made only modest changes to both U.S. and world wheat production, use, and trade data. The wheat market is characterized by a much smaller world crop than experienced the past two years and very strong demand that will be somewhat curtailed this year due to lack of supply and high prices. Several of the major wheat exporting nations in the northern hemisphere experienced production problems over the past several months and Australia and Argentina are currently very concerned about lack of moisture for their wheat crops.
The U.S. wheat crop is now pegged at only 1.8 billion bushels. The U.S. has not had a wheat crop this small since 1988. Stable domestic demand and growing global wheat use coupled with sharply reduced production has resulted in a significant draw-down in global and U.S. projected ending stocks. Stocks in the U.S. by next summer are projected to be reduced to well under 450 million bushels – the smallest since the mid 1990's when wheat prices exceeded $5.00.
Global wheat stocks are projected to decline to only 126 million metric tons (mmt) by next summer. Stocks this summer were listed at 146 mmt and last year global wheat carryover stocks were recorded as 151.5 mmt.
These market fundamentals will serve as a strong underpinning to wheat prices until it is apparent that global wheat production is rising in response to strong prices. U.S farmers are expected to increase acres seeded to winter wheat this fall. This data will not be confirmed until early January 2007. In the short-run corn prices will probably determine wheat price direction. Longer-term U.S. and global wheat production prospects will be the main price driver.
Perhaps the biggest surprises in the USDA's reports were the U.S. corn production number and the projection of total disappearance of U.S. corn for the 2006/07 corn marketing year that began September 1.
As recently as 10 days ago private firms were estimating the 2006 U.S. corn harvest at less than the 10.976 billion bushels projected by USDA in August. Just a few days before the September Crop Production Report at least one major firm published a number somewhat larger than the USDA August number. However, very few market analysts anticipated a jump in projected yield of 2.5 bu/acre to a second best ever 154.7 bu/acre average U.S. corn yield.
If harvest data validate this yield U.S. farmers will harvest the second largest corn crop in history, just fractionally larger than last year's 11.112 billion bushels, but well below the record setting 2004 crop that produced 11.8 billion bushels with an unprecedented yield of 160.4 bu/acre.
The corn production number clearly surprised the majority of traders. However, USDA cut projected carry-in supplies more than expected (due to a robust export pace for the 2005/06 marketing year that just ended) and increased their projection of corn exports in 2006/-07 more than anticipated (due in part to the small global wheat supply) such that all of increased production is projected to be consumed.
Disappearance of U.S. produced corn in 2006/07 (11.915 billion bushels) is currently projected to exceed the record set in the recently concluded 2005/06 marketing year by an amazing 690 million bushels – an increase of 6 percent
The U.S. and the world will not run out of corn over the next 12 months. However, much attention has already been given to demand potential for the next 3-5 years due to expanding energy demands and increased global trade in commodities.
This concern about the longer term is a strong underpinning to the current market outlook. When fund traders decide to own more of the potential 2007 corn and wheat market the harvest season bottom in prices will occur for corn and soybeans and wheat prices will stabilize and await production potential news.
The corn market should be the main price driver over the next several weeks for the entire grain complex. The soybean numbers (large U.S. crop, getting larger, probable record large global supplies and projected record surplus stocks) suggest that soybean prices could continue to work lower as harvest pressure mounts. However, the long-term concern alluded to above will probably mute the impact of large soybean supplies.
The interesting question the market will sort out is how to allocate available crop acres, on a global scale, as the world adjusts to the presence of energy as a relatively new player in grain market demand and to the increasing role China and India play in global commodity markets. Is the current price relationship of $2.85 December 2007 corn futures, $6.00 November 2007 soybean futures and $4.35 July 2007 wheat futures the "correct" one to produce the "proper" supply response over the next 12 months? Some significant inputs cost are declining after several years of strong increases. Don't assume long-term price relationships must change in a huge way to call forth a change in planting response. Prices look to be very strong over the next few years, compared to a historical perspective, but they may not be as strong as claimed by some analysts.
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.