Ray Grabanski column: Winter wheat plantings less than anticipated
Wheat It was quite a week for wheat markets with sharp ups and downs evident all week. Early-week trade was pressured by profit taking and desires to correct recent rallies, especially in Minneapolis, which had an unprecedented premium to Kansas ...
It was quite a week for wheat markets with sharp ups and downs evident all week. Early-week trade was pressured by profit taking and desires to correct recent rallies, especially in Minneapolis, which had an unprecedented premium to Kansas City and Chicago. Mid-week quieted down some with traders holding their breath for USDA supply and demand and winter wheat planting estimates. Of course, the high prices of the past six months attracted acres, but not nearly as many as trade expected. Pre-report estimates had trade pegging winter wheat plantings at 48.657 million acres, but the morning of Jan. 11 saw plantings of only 46.61 million. This is a huge disappointment to the trade and places tremendous burden on hard red spring wheat to secure production (particularly since weather conditions in those areas have been less than ideal). Old crop news was slightly bearish with ending stock estimates of 292 million bushels, up 12 million bushels from December. However, in light of the low plantings, there will no doubt be some effort to ration old crop. New crop months locked limit higher on the news with old crop not far behind.
Export inspections for this week were at 17.7 million bushels. The USDA weekly export sales report was neutral at 7 million bushels. Preliminary expectations were for 5.5 million to 14.7 million bushels. This is enough to stay on pace for the year. USDA made no revisions to anticipated export pace, although domestic use was reduced slightly by the high prices. The news that markets failed to attract enough hard red winter wheat plantings is telling. Of course, revisions in later reports are possible, but we also are at risk of losing some marginal acres to winterkill, etc. One thing is for sure, it places a huge burden on Minneapolis futures to ensure that the U.S. does not lose any further supplies. Input costs are going to be a big hurdle for many producers, and it will be the job of the market to compensate for those changes if they hope to entice plantings. It would be foolish to say that producers should not sell old crop prices at these levels, but at the same time, slow and steady is the way to approach it. Selling some here and there ensures that you have the ability to take advantage of rallies. As for new crop sales, the same principle applies. However, you may want to compare the cost of puts or place emphasis on cash contracts. Selling short futures in this type of environment would by near impossibly to margin and our feeling is that we may just be getting started. Additionally, we should see deferred contracts begin to erase some of their inversion in another effort to attract production.
CornCorn futures finished the week sharply higher, and, in some cases, at more than $5. The week began steady to slightly lower with little fresh news to cause any significant movement. Midweek also found the going slow, as traders took profits and also positioned themselves ahead of the USDA report to be released Jan. 11. Few saw what the bullishness that was to be, though, as government officials reduced estimated carry-out stocks to 1.438 billion bushels. This is well below December's estimate of 1.797 billion bushels and the 1.68 billion bushels estimated by the trade. The loss of carry-out reflects a small decrease in production (94 million bushels) but more noticeably, USDA revised feed and residual use higher by 300 million bushels. The move was needed to reflect the huge rate of disappearance noted in the quarterly grain stocks report. Food, seed and industrial use was reduced by 15 million bushes as a result of decreased use of corn sweetener and starch. This big revision by USDA is a huge boon for the producers in the agricultural industry, as it puts the acreage battle for 2008 in a whole new light.
USDA export inspections for the previous week came to 31.3 million bushels. USDA export sales were neutral at 28.3 million bushels. This is with preliminary expectations of 19.7 million to 41.3 million bushels. This is more than what is needed to stay on pace for the year and above the previous week's export sales. There are eight months left in the 2007 to '08 marketing year, and at the current pace, we could very well see further reduction in carry-out estimates. It would not take long to put corn in a situation similar to last year, particularly with the U.S. dollar rapidly losing ground to foreign currency.
It's amazing the impact that one day can have on the market, the market really acts upon the unknown and human thought is certainly not without mistake. The Jan. 11 report puts corn in a much stronger position to rally, and it is now very possible that even the highs of 1996 could quickly come into question. At this point, it looks like neither soybeans, corn nor hard red spring wheat can lose a significant amount of production and situations like this create the perfect environment to see just how powerful an openly traded market can become. Producers need to be well prepared for a bumpy ride this winter and spring, and it looks like we are just getting started.
SoybeansSoybean futures finished the week higher despite a slow start to the week. Traders spent the majority of their time positioning ahead of the Jan. 11 USDA report, with recent volatility keeping many from wanting to put on big positions ahead of time. So after waiting all week, the long anticipated numbers were unveiled. For January, USDA revised total carry-out lower by 10 million bushels from December to 175 million bushels. This is slightly above trade expectations, but still very low. The strongest news actually came from a big reduction in corn carry-out, a situation that puts a whole new urgency into the bid for acres in 2008. If corn carry-out continues to decline, we will need not only more corn acres, but have to find where our priorities really lay. As one observer put it, "this will mean a bare-knuckled brawl" in the grain pit going into the spring. Soybean production in 2007 was reduced to 2.585 billion bushels with a national yield of 41.2 billion. This amounts to 9 million bushels of the 10 million bushels reduction in carry-out. There still are nine more months of the year to make changes to demand, and we would guess that supplies may get tighter still before it's all over.
Soybean export reports were disappointing, but reflected light holiday interest. Export inspection numbers Jan. 7 were acceptable at 24 million bushels. We are behind the pace of last year, but still sufficient to meet current USDA projections. Export sales for the same week of Jan. 3 were poor at 7.2 million bushels, a new marketing year low. Again, this is for the holiday week of New Year's.
Never has the statement that risk brings reward been more true. The past year or so has been a godsend for many producers, but also tested the extent of grain marketing abilities. Input costs continue to rise, and producers have to find a way to handle that as well. This past week brought "bean in the teens," as well as offered every idea that we will continue to rally. Producers need to closely examine their individual situations and discover where the profit potential lies for them. It is the job of the market to help sort that out, and because of that, the fight for acres is really just beginning. While the report itself was not a huge boon for soybeans individually, it puts the outlook for the next year in a whole new light. An increase in corn acres (and even wheat to some extent) would come at the cost of soybeans right now, and that is not something we can allow to take place. Because of the tenuous situation, we again recommend caution in making sales for 2008. Option contracts could work very well, as even a moderate amount of money for a high-priced put could be well worth it. At worst, you spend up-front money but sell your cash grain for even higher.
BarleyThe outlook for barley took off again, with USDA releasing its monthly supply and demand estimates. While wheat carry-out increased, corn supplies decreased substantially on increased feed demand. This opens a huge amount of opportunity for barley to fill a market gap, particularly since barley is a logical substitute for a crop must compete for production acres in 2008 and has many other uses that must be fulfilled. Barley use was accordingly raised by 5 million bushels as a result of increased feed demand, although USDA lowered food and industrial use by a like amount for this month. We anticipate, however, that feed usage estimates will increase in the next few months, increasing the price of both feed and malt supplies. Exports for barley continue to be impressive as well, with the U.S. shipping 1.2 million bushels of barley for the week ending Jan. 3. Total shipments for the year are more than double the same time frame 12 months ago.
DurumGrowers have gotten glimpses at some initial contracts for 2008, and the prices are much higher than we have seen in recent memory. Rumors of $11 are common, but we have to ask ourselves if it's enough. It's true that $11 is a huge premium to new crop hard red spring wheat futures, but given the Jan. 11 winter wheat planting numbers (well below expectations), there will be significant efforts to entice wheat growers into producing that class instead. Ending stocks of durum were revised lower from 19 million bushels to 14 million bushels.
USDA released its final production numbers for the 2007 growing season. Total production stands at 25.2 million hundredweight, slightly above the 24 million hundredweight in 2006, but below 2005. Yield per acre was a healthy 1,708 pounds per acre, although total harvest acres were the lowest of the past three years. North Dakota as a state produced a huge amount, with production growing over that three-year time frame. Minnesota was slightly higher with Michigan seeing substantial reductions. Buyers are beginning to look around for acres, but they will have their work cut out for them considering the very high prices of other crops as well as the price of inputs.
OilseedsWhile many other crops saw sizable adjustments in the USDA report, total oilseeds as a class were relatively quiet. However, that doesn't mean that canola, flax and sunflower prices are ready to drop. On the contrary, these crops will have to at least maintain their production, with the exception of flax, which will have to make serious bids to bring production up. In fact, if soybean acres fall flat, the U.S. could very well turn to these other crops as a source of vegetable oil for industrial and human consumption.