The transition from fall into winter trading is an important turning point for grain markets. By now the big questions on the year’s supply are answered. Actual harvest results came in better than expected. The buildup in soil moisture, because of heavy spring and early summer rains, was a key factor in alleviating late summer dryness. The question now is how well demand will be able to accept this supply.
Grain supply fluctuations from planting through harvest determine almost all of grain pricing from spring through fall. During the winter, though, these markets typically settle down. It is at this time that outside market issues exert a little more influence. Changes in the U.S. dollar, Federal Reserve policy and money flow between equities and commodities are all issues to consider in the weeks ahead.
Corn: Abundant stocks
While the trade has been dialing up its expectation of yields in recent weeks this also has been balanced by revisions in acreage. Allendale’s most recent production estimate, of a record 13.827 billion bushels, is determined from a yield of 158.2 bushels per acre and an acreage decrease. On top of a record production, the U.S. Department of Agriculture (USDA) recently recognized a higher revision in old crop ending stocks.
A sharp decline in corn prices (CBOT:CZ13) normally will spur demand and, generally, 30% to 70% of a year’s increase in production can be offset by rising demand. But world feed buyers finally are getting adequate corn exports: At last count 45% of USDA’s whole-year sales goal was sold. That is an impressive total for this time of year. Livestock numbers will be slightly higher than last year. Chicken and pork expansion almost will be offset by a 5% increase in cattle feedlots numbers for 2014. The USDA’s models imply that quantity fed per animal fluctuates sharply with corn supplies. Feedlots can switch to distillers’ grains, wheat and other products based on price. With a few more head, and more corn per head feeding, we have no qualms about saying a 5.050 billion feed and residual number, up 575 million bushels from the old crop numbers, is reasonable.
Ethanol will not help mop up this year’s extra supply. Although producers are making strong profits of 50 cents per gallon, they are limited by the blend wall. The EPA adjusted the 2014 ethanol blending mandate down from 14.4 billion gallons to 13.0 in October. Allendale estimates that will limit corn use in the 2013/14 year to only 4.7-4.8 billion bushels, assuming only moderate RIN (Renewable Identification Number) usage.
An ending stock of just over 2.0 billion bushels could give down potential to $3.70 December corn. While corn futures currently have posted a minor rebound off their early October lows, we look for one more attempt at sub $4.20 levels.
Soybeans: Tight ending stocks Unlike corn, soybeans (CBOT:SX13) are still just getting by. Much of the U.S. picture actually will be determined by the current soybean planting and spring harvest for South America. We currently forecast U.S. ending stocks at 160 million bushels. That is a little higher than the old crop stocks that recently were revised from a tight 125 million bushels to now 141 million bushels. While these stock changes sound trivial, the new crop forecast is based on a usage of 3.1 billion bushels. A minor change in that U.S. demand picture can have a sharp impact on these ending stock numbers. China had flocked to the U.S. export market when Brazil focused on corn exports this fall as exportable soybean supplies started to run low. While the United States is the only shop in town right now, the trade expects a new record to be posted for Brazil and a near record for Argentina. Farmers in South America generally plant from mid-September through early November. With the corn planting delayed in the first four weeks of that window, the trade expects a good increase into soybeans.
Without any production problems, the U.S. export market would be only a temporary stopping point for world buyers. Soybean futures could fall to $12.50 per bushel in November, then even lower as spring rolls around. However this is not a done deal yet. The South American crop is not even fully planted. And even if big supplies are harvested, the trade has not forgotten the port mess in Brazil from this past spring and summer. If grain companies try to cram an even larger crop through those ports, which have not seen an increase in capacity, it certainly is possible a few extra orders for U.S. product could be made. It does not take much to turn a 160 million bushel ending stock and a slightly bearish forecast into a 120 million bushel estimate and a sharply bullish forecast.
Wheat: Supply issues?
While corn and soybean markets have spent recent weeks revising yield estimates higher, the wheat market (CBOT:WZ13) has had to revise its expectations of adequate supplies. The summer and fall of 2013 marked a return to normal supplies on recovery from last year’s world production decline. In recent weeks there has been discussion suggesting supplies during this winter and beyond may not be as good as expected. Argentina’s wheat areas have seen continued weather problems since June. The trade feels they may go back to last year’s low production level of 10 million tonnes or perhaps even lower. Many question whether China, the second largest wheat producer, will see further revisions lower in the coming months. The newest area of concern is now Russia and Ukraine. While they have just wrapped up a bountiful harvest, recent heavy rains have delayed their normal September through early November winter wheat planting. Those fields may be left unplanted over the winter and perhaps planted with a spring crop such as corn.
The result is that the world may lean on U.S., Canadian and European Union supplies more than expected. Instead of a sharp resurgence in wheat stocks back to burdensome, they will simply be left as a little less than average. Before the Russia/Ukraine planting issues, we felt $6.90 per bushel was an adequate upside target for December Chicago wheat. With them included there is potential for up to $7.20 per bushel.
Lean hogs: Lower prices?
There has not been any agricultural market more affected by the government shutdown than lean hogs. Over the past 15 years, cash markets have been automating pricing decisions based on the various USDA summary reports on pricing. In addition, without the daily and weekly reports on slaughter levels, the trade cannot assess accurately whether the USDA’s recent Hogs and Pigs report is correct. That report implied that the recent run of low slaughter levels would be fixed soon. In fact, it suggested we may see weekly kills running 1% over last year by the end of October. This also is important as October and November are the seasonal heavy supply period.
That report also suggested there would be minimal impact from the hog virus PED. Much of the industry had previously been dialing in net year-over- year decreases from December through March because of this problem. If the USDA is correct about the winter supply period, then December lean hog futures will decline below $84.00 per cwt. Most of the industry is taking a wait-and-see attitude on that potentially bearish idea. Hopefully, by early November we will see if the USDA’s survey of producers was correct. On a seasonal basis, hog futures typically decline until mid-November. By then the trade has dialed in where the correct cash hog low will be.
Live cattle: Shutdown hurt demand?
Placements of new calves and feeders into feedlots have been lower than last year since May. The surprising moisture pattern in the Plains this summer recharged pasture ground. This led to many producers going for cheap weight gains while they wait for cash grain prices to fall. Some producers even have suggested that expansion is underway. Nine of the top 12 beef cow states have seen resurgence in pasture conditions. This means females that would normally be going to the feedlot will be held back to increase the beef cow herd. This actually helps lower beef production levels in years one and two of this cycle. While expansion is not completely agreed on in the industry, no one can argue that Q1 and part of Q2 cattle slaughter will be down sharply.
While we are clear supply bulls for cattle, we can’t ignore some concern for beef demand from the government shutdown. Government workers and many companies that rely on government business are affected. The last extended shutdown, starting in December 1995, saw a 3.27% decline in live cattle futures. The other extended shutdown began in 1978. Alhough there was only a minor change in the December cattle price from the start to the end of the shutdown, we were interested to see that the price high down to the price low within the shutdown period was a huge 7.2%.
Just like this year, the first few days of a shutdown actually saw a rally that peaked on Oct. 6. For the short-term market, we are not out of line in suggesting the December contract could see weakness that pushes past $128.62 per cwt. because of this problem. We would prefer a bear spread in this example rather than outright shorts in futures. For the long-term picture we still feel the deficit in supply for Q1 is too juicy to ignore. After our expected setback in prices in October and early November we are looking at a $140.00 per cwt. objective for February 2014 futures.
Rich Nelson is Director of Research at Allendale, Inc. in McHenry, Ill. Allendale is registered with the CFTC and NFA and is a member of the NIBA.