Corn and soybean production were lowered somewhat more than trade expectations in last week's USDA World Agriculture Supply and Demand Estimates (WASDE) and Crop Production reports. On the other hand, usage was also projected lower, which made for higher-than-anticipated 2011-12 corn and soybean ending stocks.
Melvin Brees, University of Missouri analyst; Darrel Good, University of Illinois grain marketing specialist; and Mark Welch with Texas A&M University, address the implications of this "mixed news."
USDA lowered its estimate of this year's average corn yield by 0.4 bushel to 146.7 bushels per acre. That lowered total production to 12.31 billion bushels. However, expected feed and residual use was cut 100 million bushels. The net result is a reduction in expected 2011-12 corn carryover from last month's estimate of 866 million bushels, to 843 million bushels.
Along with U.S. projections, a number of adjustments to foreign production and use resulted in a decline in projected world ending corn stocks from 123.2 million metric tons (October) to 121.6 million metric tons (November), notes Brees.
No changes were made to the USDA's 2011-12 corn price forecast, which is expected to range from $6.20 to $7.20.
Good, with the University of Illinois, mentions that outside the U.S., corn production forecasts increased for Argentina and China, but were reduced for Mexico. Total foreign production was, however, upped by only 80 million bushels, or 0.2 percent.
Good also had comments on the consumption side, noting that the forecast of domestic feed and residual use of corn was reduced, as noted, by 100 million bushels to a total of only 4.6 billion. That's 200 million below the "low level" of feed and residual use last year, he says.
"USDA cited reductions in broiler production and a smaller crop forecast as the reasons for the cut. A smaller crop implies smaller residual use," says Good.
The average soybean yield estimate was reduced by a mere 0.2 bushel to 41.3 bushels per acre, lowering total 2011 soybean production by 14 million bushels from October's outlook, to 3.046 billion bushels. That's 293 million bushels smaller than last year's soybean crop.
Good, in Illinois, notes that changes in state-level yield forecasts for the major producing states were one bushel or less-except for the two bushel increase for Wisconsin.
Brees says projected 2011-12 soybean exports were reduced 50 million bushels reflecting the slower pace of export sales. "Although exports trail last year's record sales pace, based on historical data, some analysts point out that exports could still be stronger than the USDA projection," he remarks. The lower USDA export projection more than offset the reduction in expected production, causing projected ending stocks to rise from last month's 160 million bushels, to 195 million bushels. World 2011-12 soybean carryover was increased slightly from 63 million metric tons to 63.6 mmt.
USDA's soybean price forecast was lowered 55 cents; 2011-12 prices are expected to range from $11.60 to $13.60.
"Outside the U.S., the soybean production forecast was reduced by 37 million bushels for Argentina and increased by 55 million bushels for Brazil," says Good. "The world production forecast is almost unchanged from last month's forecast and about 2 percent smaller than the 2010-11 crops."
As for wheat, the government's 2011-12 production estimate was lowered nine million bushels to 1.999 billion bushels as a result of a cut in expected yield of 0.2 bushel, to 43.7 bushels per acre. No changes were made to projected wheat use, resulting in 2011-12 wheat ending stocks of 828 million bushels. World wheat 2011-12 carryover was increased slightly from 202.4 mmt to 202.6 mmt due to adjustments in world production and use.
USDA's 2011-12 wheat price forecast was lowered from 5 to 15 cents, and is now expected to range from $7.05 to $7.75. Good says much of the 2011 winter wheat crop has already been sold by producers.
Good adds the forecast of foreign wheat production was increased by 86 million bushels (0.4 percent), reflecting a larger crop estimate for Kazakhstan.
"The USDA reports were initially interpreted by most analysts as neutral-to-bullish for corn and neutral-to-bearish for soybeans," notes Brees. However, European debt worries, a stronger dollar and a lower stock market overshadowed corn and soybean supply/demand fundamentals." He notes that corn futures prices closed about 5 to 7 cents lower and soybean futures prices were nearly 20 cents lower during the trading session following the reports last week.
"Market price signals are mixed," Brees continues, reporting that corn and soybean futures prices "are well off contract highs." Corn prices are within USDA's projected price ranges, but soybeans are below the forecast range.
"Higher prices are possible and prices historically trend higher into spring. But corn basis is strong and market carry is narrowing, a market sell signal. Soybean basis is average to weaker than average at most locations and carry is neutral," Brees points out.
He says other factors will continue to play a role in prices and "could trigger negative commodity price events regardless of relatively tight U.S. supply/demand situations." European debt problems relating to the crisis in Greece, along with worries about Italy, create uncertainty-and potential for unexpected negative price action.
"These problems can affect the value of the dollar, which in turn impacts export demand and commodity prices," says Brees, adding that "money flow and fund position changes in the futures market also add volatility."
Further, other foreign economic worries, such as a slowing of the Chinese economy, add potentially negative market factors.
"Domestically, soybean stocks are expected to be more abundant than earlier forecasts, with the forecast of year-ending stocks representing 6.3 percent of projected consumption. It appears, however, that the lower U.S. soybean export forecast may be pre-mature. Weekly export sales reports will continue to shed more light on that issue," notes Good.
"The projection of domestic year-ending stocks of corn represents 6.7 percent of projected use. The lower projection of feed and residual use of corn this month also appears pre-mature. The pace of consumption will be revealed in the USDA's quarterly Grain Stocks report, with the estimate of Dec. 1, 2011 stocks scheduled to be released on Jan. 12," Good continues.
"Overall," Good says, last week's projections "should support corn and wheat prices in the upper part of the recent trading range. The projections are less supportive for soybeans, suggesting trading in the lower part of the recent range."
Mark Welch, economist with Texas A&M University, reveals his 2012 corn marketing plan.
"With tight stocks and strong demand, corn cannot afford to give up acres in 2012," Welch warns. "That alone should keep prices strong through the winter with additional volatility provided by weather concerns as we get closer to spring. But if yield prospects return to normal and demand is constant, planted acreage near 2011 levels will result in a significant increase in ending stocks. Prices closer to $5 than $6 could be ahead in such a case."
"Careful budget analysis will be needed this winter to evaluate pricing opportunities for next year's crop early in the season. Now is the time to familiarize yourself with tools that establish downside price protection while keeping the opportunity to profit from higher prices," Welch tells producers.
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