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Ray Grabanski column: USDA report friendly to wheat, soybeans

Wheat Wheat was sharply higher this week with all three exchanges closing a limit higher. Leading the way has been the Minneapolis Grain Exchange, which set a record of being the first exchange in the United States to trade wheat at more than $14...

Wheat

Wheat was sharply higher this week with all three exchanges closing a limit higher. Leading the way has been the Minneapolis Grain Exchange, which set a record of being the first exchange in the United States to trade wheat at more than $14. In addition, the MGEX released news that it will be increasing its limits to 40 cents starting Feb. 12.

The catalyst behind this sharply bullish trend has been a strong demand for spring wheat as well as concern over the tightness of stocks. Prices also must stay higher to secure acres this spring, as wheat continues to compete with corn and soybeans.

This upward push on the MGEX has spilled over into the other two exchanges pushing them sharply higher as well. Kansas City Board of Trade also has received some support from the strong demand for hard red winter wheat, which millers are looking to mix in with expensive spring wheat. USDA released its monthly world supply and demand report, which was bullish for wheat. Wheat stocks for 2007 to '08 were lowered by 20 million bushels, with a reduction in feed and residual use more than offset by increased exports. Projected exports were raised by 25 million bushels.

Globally wheat production was raised just 600,000 tons, with increases coming from Argentina and the former Soviet Union. World imports, exports and consumption all were raised. Global ending stocks were lowered by 1.2 million tons to 109.7 million tons. This projection will be the lowest global ending stocks in 30 years. This report reflects preliminary expectations and will keep wheat moving bullish.

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The whole commodity world is watching with amazement as Minneapolis hard ret spring wheat is blowing the top off that market, moving limit up the past nine days almost every day. The March futures have rallied $2.56 in just nine days (five years ago, that was the cash bid for the same commodity), just short of full limit moves every day. In that time span, it has been limit down a few days during the trading day, only to finish limit higher anyway. The relationship to the new crop market isn't defined, either, as the new crop month has lost as much as 60 cents to the March contract in a single day as the March closes limit up some days, with new crop limit down on the same day.

Normally, one would expect such movement in a market just before new crop supplies are delivered, but actually in the Minneapolis hard spring wheat, we are six months removed from harvest in the March contract, as not until August will new crop supplies be delivered to the marketplace. Yet, the March Minneapolis contract is blowing the top off this marketplace - six months before new crop contracts are in delivery. One has to wonder what will happen to the May contract once it becomes the lead month. And what do we do in trading the next six months? Clearly, we are rewriting history books this moment, and the whole world is watching with amazement as we are reestablishing our understanding of what markets can do when supplies become short. The combination of fund buying with little or no farmer selling is putting new definitions of what grain markets can do. A food grain like wheat is not something wealthy countries are accustomed to do without, and we are finding out how valuable our food commodities are to users who like to eat them.

One can't help but wonder what will happen next.

Corn

Corn futures were nearly steady despite wide swings from day to day. Corn opened the week sharply higher on spillover support from wheat and speculative buying as well as ideas that corn must maintain higher prices to insure acreage this coming spring. On Feb. 5, corn fell slightly, still supported by wheat but without its own bullish momentum to maintain gains. As we have said for some time, corn is not the leader of this grain market, it is merely reacting to surges in competing crops to avoid losing acreage. By midweek, corn had fallen to modestly lower on profit taking with minor pre-report positioning also a factor. Feb. 7 continued the consolidative trend with traders hesitant to buy in ahead of Feb. 8's reports. Monthly USDA world supply and demand reports saw no change from the January numbers with U.S. carry-out of 1.438 billion bushels. This is in the middle of expectations and still a drastic fall from where numbers were only two months ago. World coarse grains supplies were projected to be slightlyhigher. Corn production was lowered reflecting 1 million tons lower in Argentina, 700,000 tons lower in Mexico and 1 million tons lower in South Africa. Imports and exports also were nearly unchanged. This report does not change our predictions, particularly as it was friendly to both soybeans and wheat. Look for price rallies to continue through this month.

USDA Export Inspections were bullish at 47.7 million bushels. This is with expectations of 45 million to 54 million bushels. Inspections were also bullish because they came in above the 45.9 million bushels needed to stay on pace for the year. Primary destinations were Japan and Mexico. Exports sales for this past week were reported at 43.5 million bushels. This is with expectations of 35.4 million to 57.1 million bushels. This is enough to stay on pace for the year with a projection on 2.45 billion bushels.

While this month's USDA report may appear rather uneventful on the face of it, it bears closer examination. For one thing, the friendliness of the report to soybeans and wheat is already a boon to corn as it means it has to compete that much harder to retain any sort of production in 2008. Also, inflation is still an issue that is becoming more and more apparent on the input side of the equation. This, along with possible rotation issues in some areas, puts corn at a distinct disadvantage to soybeans. While we don't expect corn to come out the winner as far as devoted acres this year, we can't afford to give up more than 3 million to 5 million acres and that's given no weather issues. All in all, we feel that prices are set to increase at least through this month, with another possible spike this fall, depending on how the cards fall.

Soybeans

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Soybean futures had a volatile week to say the least, but in the end, we finished higher as USDA reports confirmed a continuing trend of tight supplies. The week started higher as traders followed through with previous week's advances. In general, the eye is still towards buying acres for 2008, although the approaching report Feb. 8 kept traders conservative, with minor profit taking evident Feb. 6 and 7. The morning of Feb. 8 saw the release of the monthly Supply and Demand reports, which only reinforced recent market movements as carry-out projections were again reduced. USDA is now projecting a 2007 to 2008 carry-out of 160 million bushels, down 15 million bushels from January and 7 million bushels lower than the average trade expectation. World carry-over of soybeans also dropped slightly now at 45.82 million metric tons, compared with 46.24 million metric tons last month. Production of soybeans from Brazil and Argentina was unchanged.

For the week ending Jan. 31, USDA is reporting 25.22 million bushels inspected for shipment, slightly behind last year's pace but fast enough to keep up with USDA projections. Sales, however, continue to be huge with USDA reporting 39 million bushels for the same week. This is one of the highest numbers this year and also well above expectations. It is possible that USDA will be forced to raise export numbers slightly if this keeps for a few more months.

Producers have rarely, if ever, seen a market that is so intent on going higher. It can be difficult to stomach and nerve racking, if only for the reason that we are afraid of what will happen if we sell and also afraid of what will happen if we do not. The question that has to be asked at that time is first, what is causing this increase (short supplies, inflation, competition for acres) and second, how or when would that change? The answer to the second is that we have six months or so before the U.S. would harvest and our domestic supplies are small. Brazil's crop is unchanged from previous levels, and while export from the U.S. will slow down, we are not likely to see a downward adjustment in demand from USDA. As for new crop, ProAg feels we are still too far away from planting with very attractive prices in competing crops to believe that traders will not continue to put effort into buying. To sooth nerves, (or at least sleep at night) buying a few put options is not a bad idea. However, be cautious and conservative in all sales as weather events, etc., could really push markets in the coming months.

Small grains

Small grain prices continued to advance, supported by steady limit higher moves in wheat as well as the release of quarterly Statistics Canada reports. Durum prices have been widely reported around $22 with malt barley bids around $7. New crop contract prices are moving higher as well to compete, although some are less flexible as for quality and delivery options than previously. We advise caution in this as we feel that buyers of small grains need to put out that incentive to produce to compensate for shortfalls this year. Statistics Canada reports released Feb. 5 confirmed this, as grain stocks of durum, barley, oats, etc was all substantially lower than last month. Barley supplies were down 5 percent from the previous year while durum was down a whopping 29 percent from the previous year. This confirms tremendous potential, particularly for old crop supplies.

Dry beans

Dry bean markets were largely unchanged, although all the underlying factors calling for higher prices are still intact. In fact, USDA reports the morning of Feb. 8 strengthened the outlook as competition for acres becomes ever tighter. The higher input costs of dry beans and the very attractive prices of soybeans means that buyers have their work cut out for them. Statistics Canada reports dry beans were mixed, although lentil production was down 47 percent. Again, we recommend holding off, at least until closer to planting to allow prices to fully compete for production.

Oilseeds

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Statistics Canada reports, along with USDA supply and demand numbers, confirmed recent uptrends of all grains, but especially those of oilseeds. First, soybean carry-out continues to fall, with demand for vegetable oil and meal products still strong. Additionally, Statistics Canada reports reflected lower oilseed production and stocks as of December 2007. Canola supplies were down 9 percent, soybeans down 34 percent, flaxseed down 44 percent and sunflowers down 36 percent. This puts buyers in a poor position going into 2008 as it means supplies everywhere will be tighter than we have seen in a long time. This would be troubling even at lower price levels, but given high input costs and the high prices of small grains, we suspect that old and new crop have a ways to go before the top is in.

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