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Supply and demand revisited
Controversy and excitement make
headlines. Looking at the December 9 USDA report for the grain markets, nothing
profound or unexpected happened. The market slid lower as the tone of the
report was negative, however, nothing “new” was discovered or disclosed that
the market hadn’t been anticipating for the last two weeks.
Even though the report may have been
underwhelming for journalists, the information is useful if you are a farmer
whose livelihood depends on smart decisions. Below is a quick recap of the report:
The USDA's end of year stockpiles
estimate for the U.S. is now pegged at 848 million bushels, up slightly from
its November forecast of 843 million bushels, and above the average analyst
guess of 838 million. The USDA cut its food, seed and industrial demand
projection by 5 million bushels, to 4.6 billion. The USDA also raised its world
ending stocks projection to 127.2 million metric tons from a prior forecast of
121.6 million. USDA estimates China end of year supplies at 56.97 million
metric tons, up from 51.72 million estimated last month. Overall, corn prices
are still in a sideways trend. It a good sign that corn did not plunge through
technical support levels, nor were any sell stops triggered below technical
The USDA raised its estimate of U.S.
2011-12 soybean ending stocks to 230 million bushels, up from 195 million in
November and above the average trade estimate of 214 million. The stocks
increase came from reductions in USDA's forecasts of U.S. 2011-12 soybean
exports and domestic crushing. The USDA also raised the 2011-12 global soybean
carryout to 64.54 million tons, from 63.56 million in November.
The USDA projected domestic ending
stocks of wheat to be at 878 million bushels for the 2011-12 marketing year,
which ends May 31. That's up 6% from a November projection of 828 million, and
higher than the average analyst estimate of 830 million. The increase reflects a
50-million-bushel cut in export demand. Wheat exports have sagged as abundant
supplies from around the world, from the Black Sea region to South America,
have given importers cheaper options.
THE BIGGER PICTURE
In the big picture, the USDA reports
do not matter that much. They may create some excitement that offers
opportunity; or they may be underwhelming because most of the news was already
factored in. While USDA is issuing its reports, and everyone is analyzing them,
there are at that very moment new factors coming online that will change the
markets’ course. That’s why we always urge marketers to spend more time on
their strategy—what they are going to
information—than on gathering information.
relevant for coming up with possible price scenarios that
could happen. Corn, beans, and wheat are all at critical crossroads
fundamentally and technically on charts. If you understand that, you have at
least some idea of likely scenarios that could play out. If prices can hold at current
levels, expect sideways movement into year end. However, if fundamentals turn
negative, prices could drop in a heartbeat; corn could lose $1.00, beans $1.50
and wheat $.75.
Here’s where we move from
information-gathering mode to strategy mode: Pause and reflect on what a price
movement like that would mean to your farm operation. That is a lot of money
and we want to caution you to be ready with your strategy if prices do drop. Or
for that matter, if prices trade sideways, when will you pull the trigger on
additional cash sales, and what will that cash sale mean to your average price
per bushel and bottom line?
The best response is a prepared
response, so start thinking now about what you will do with your marketing in
the event that any of these potential scenarios starts to develop.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2011 Stewart-Peterson Inc. All rights reserved.