Old Crop Still An Issue As Growing Season Begins

April 7th, 2014

By:

Category: Grains, Miscellaneous, Oilseeds

(Farm Futures) – Farmers are chomping at the bit to get into the field. But while growers focus laser-like concerns on 2014 production, the market is still sifting through ideas about how tight old crop stocks of corn, soybeans and wheat are.

March 31 quarterly inventory estimates from USDA hardly settled the debate, which continues into the agency’s April 9 monthly supply and demand report. The end of March data showed how much of the 2013 was left; the April update provides USDA’s official interpretation of what that means for the rest of the marketing years.

While the soybean stocks report was 10 million bushels or so more than expected, results were quickly dismissed by traders, who drove prices to new contract highs. A few more beans doesn’t make a dent in the deficit that would occur at current rates of usage. Total soybean sales and shipments are already 7% above USDA’s forecast for the entire marketing year. Crush is also strong thanks to brisk exports of soybean meal.

Higher prices are needed to discourage that demand and encourage imports and early harvest of 2014 production. USDA already assumes these three factors will occur to keep the U.S. from running out of soybeans this summer. As a result, only a token reduction in ending stocks is likely April 9, if anything at all.

Corn inventories are not nearly as tight, but they also appear to be shrinking. USDA’s March stocks came in 100 million bushels or more below the levels most suspected, suggesting feed usage over the winter was good. Exports are also improving, and ethanol production surged to its best level of 2014 thanks to a spike in biofuel prices triggered when rail cars weren’t available to fulfill shipments to major gasoline markets.

USDA should recognize at least some of this better demand April 9, perhaps cutting 75 million bushels off carryout. More reductions could follow, unless higher prices choke nascent demand increases.

That type of rationing already appears to be happening in wheat. The stocks data found more wheat on hand than anticipated, a hint the agency previously overestimated feed usage. With wheat priced $2 or more above corn, livestock producers have cheaper alternatives, both in the U.S. and around the world. While importing countries with money continue to buy U.S. high quality wheat, many of the world’s largest buyers, including Egypt, are very price sensitive. As a result projected U.S. ending stocks on April 9 could increase towards 600 million bushels.

These April numbers market a turning point in the market’s psychology. USDA makes its first monthly estimates of 2014 production, supply and demand May 9. With spring planting in high gear, new crop concerns will begin to dominate the outlook. Old crop concerns won’t disappear, but they will have to share the spotlight.

Corn prices pushed above $5 for both old and new crop futures, but the rally showed signs of stalling there. For one thing, a buck a bushel gain is nothing to dismiss, so some profit taking was natural, especially as farmers moved inventory ahead of the busy spring fieldwork season. But futures also have a seasonal tendency to make an early April top. Sometimes they move higher later during the spring and summer. Sometimes they don’t.

Tighter old crop supplies make the market more nervous when threats arise during the growing season. Stocks look tighter than they did at harvest, but still not tight enough to make a rally more than a possibility for 2014.

Trying to predict weather or prices with any degree of certainty is difficult. And neither activity is managing risk. Doing that requires limiting the impact of lower yields or lower prices. That’s why we recommended high levels of Revenue Protection crop insurance, along with sales of at least 35% of expected production at what are profitable prices.

Soybeans came up short on their first test of $15 after the March 31 reports.  But previous attempts to break this market failed, creating erratic swings that aren’t for the faint at heart. Indeed, most growers don’t have many old crop soybeans to sell and are rightly focused on 2014 production.

USDA’s first survey of planting intentions showed growers plan a huge switch from corn to soybeans this spring. Soybeans offered slightly more profit per acre in many places, as well as the chance to improve rotations after pushing corn on corn. New crop futures continue to lag old crop, but are still likely to improve if old crop surges, as happened last year.

Trouble is, old crop is a roller coaster, and there’s no telling when and if the market might come off the rails. Good yields could easily double carryout in the year ahead, depressing prices to $10 or even lower. That makes $12 November futures look attractive, even if it pales by comparison to old crop.

Wheat prices staged the most dramatic rally of the three major crops on a percentage basis during the first quarter of 2014. But they could also be the first to retreat. Still, there’s hope the market’s January bottom marked a long-term turnaround.

The key for growers now is deciding how much risk to take on that notion, and how to take it. That’s no easy chore, especially with so much uncertainty about their production. Winter kill from the Plains into the eastern Midwest, coupled with long-term drought over the western hard red winter wheat belt make yields as hard to predict as prices.

Crop insurance will help. So will locking in sales above the Revenue Protection base price. We recommended pricing 50% of winter wheat and 40% of spring wheat. The next four to six weeks could see one last weather rally. Put options are a little less expensive than earlier this winter, but won’t offer much payoff barring a retreat back towards winter lows.

Post-harvest rallies likely depend on production problems in other parts of the world. Queensland in northeast Australia remains very dry, but other parts of the continent are getting much needed rain ahead of planting, despite forecasts for a potential El Nino during the growing season.

Add New Comment

Forgot password? or Register

You are commenting as a guest.