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Ag Outlook numbers eyed this week
This week's USDA 10-year agricultural projections have market-watchers reacting with a negative tone. In fact, the government's numbers are seen as surprisingly bearish for the coming two years.
The USDA Agricultural Projections to 2021 Report indicated a rather negative picture for the coming two years.
Long range forecasts, put out by USDA Feb. 13 (using estimates put together in late November 2011 and which will be updated Feb. 23-24 at their annual Ag Outlook meetings), indicates a significant decline in price averages for grains in 2012/13. That includes a drop in corn price from $6.70 this year to $5 next year and $4.30 in 2013/14. Wheat drops from $7.40 this year to $6 next year and $5.75 the following year.
Soybeans drop from $12.60 this year to $11 next year, and to $10.30 in 2013/14.
Thereafter, prices recover somewhat, but that highlights the fact that current high prices might be an anomaly, and prices aren't likely to stay there for long. These drops are precipitated by a return to 'normal' stocks levels for corn of 1.623 mb next year, with a recovery of yield to 'trend' and a 2 million acre hike in acreage (actually that is smaller than most private estimates).
This is exactly the reason Pro Ag has been encouraging hefty hedges of corn, soybeans, and wheat in multiple-year hedges. The outlook is for a response of larger supplies and a cut in demand due to recent high prices, as we go forward in the next few years.
The only thing that could derail this projection is another poor crop year (like the US suffered in 2011, with corn -9% from trend yields and soybeans -5%). But the likelihood of that happening might be slim (10% or less?).
That encourages aggressive sales of grains at current price levels.
That's why Pro Ag has recommended aggressive sales of 2012-2015 crops, as its likely these price levels will slowly erode over the coming 6-12 months, especially if the production season of 2012 turns out to be better-than-expected. With trend yields, corn should yield a new record large 164 bu/acre in 2012, with a resulting 14.235 billion bushel crop that should result in a 1.623 billion bushel carryout. That will be double the current projected carryout! That pressures prices in 2012 to the $5 level - about $1.70 below the current years projected prices.
Soybean production is also expected to rebound in 2012 to more 'normal' trend yields of 44 bu/acre, well above the 2011 crop yield of only 41.3 bu/acre. The rebound in soybean production will mean a 3.215 billion bushel soybeans crop, well above 2011's 3.046 billion bu crop in spite of a loss of 1 million acres in planted acreage (mostly lost to corn). That will leave a carryout of 209 million bushels in their projections, but when updated in late February will be hiked to higher levels, as the Nov. projections included beginning stocks of only 195 mb. Already USDA has hiked that number in the past few reports to 275 million bu (in spite of smaller SAM crop projections). One gets the feeling that world production is expanding at a time when demand is shrinking! That is not a good prescription for the long term outlook in grains.
Recall that it was in this report in 2007 that the bull market of ag commodities was sparked, when USDA projected the huge ethanol expansion and demand boom from the world's importers (especially China) that began the great bull market of 2007 to 2011. It culminated in the price increases to $8 corn, $16.50 soybeans, and $13 wheat ($24 if you are a spring wheat producer!) in 2008, only to be bested in 2011 for corn (but wheat and soybeans to be below 2008 highs). Yes, the track record for USDA has been good the past few bull market years - will it be as prophetic in the bearish outlook in 2012-21?
This report might shape the outline of trading for the coming few years, as projected acreage from this report ends up in the spring USDA projections for the new crop year. The report will be updated from the November forecasts at the USDA Ag Outlook Annual conference Feb. 23-24, and these updates will also be anxiously awaited by the market. But the overwhelming message here is, don't be caught underestimating what the "fertilizer" of high prices can do for the world's stocks numbers. It may be more responsive than you think to incentives for production!
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