June 19, 2003

 

Market Advisor: Spring Rally Fizzles

By George Flaskerud, Crops Economist
NDSU Extension Service

Commodity prices overcame a somewhat negative Supply and Demand Report on June 11 but turned down sharply on June 13. The report and market reaction cast considerable doubt on the possibility of prices surpassing recent highs. Continued favorable growing conditions could result in much lower prices for all crops.

At least one-third of anticipated production should have been contracted following example marketing plans presented earlier in the year for wheat, corn and soybeans. Catch-up sales should be made by the end of June on any price recovery.

If the Chicago November soybean futures price rallies back to near its recent high of $5.88, consider using put options to establish a floor price on the second one-third of anticipated production. That is a profitable price for most producers. Strategies for the second one-third of wheat and corn production will be addressed at a later time.

Wheat ending stocks for 2003-2004 were projected to be 28 percent of total use which is historically consistent with the current Chicago December futures price of $3.33. The price rallied off the early-May low of $2.96 to a high in mid-May of $3.58 because of decreased crop prospects in the Ukraine, Eastern Europe, India and Australia. The Ukraine crop is expected to be only 35 percent of a year ago. The crop in Russia was projected earlier to be 71 percent of a year ago. Those two countries are expected to export just a small fraction of what they did last year. Potential for the U.S. soft red winter wheat crop also diminished.

The Chicago price traded sideways during mid-May to mid-June as prospects for the U.S. hard red winter wheat crop improved. USDA increased its size estimate by 63 million bushels from a month earlier.

The Minneapolis futures price rallied in early-May along with Chicago but then generally declined. Consequently, the Minneapolis premium over Chicago for September futures declined from almost 55 cents in early-May to 20 cents mid-June. During this time, the spring wheat crop was planted without much difficulty and had an 80 percent good-excellent rating as of June 15.

A continuation of this very high rating could result in a much larger projection for spring wheat and durum production by USDA in the July 11 Supply and Demand Report. From a price risk management point of view, this scenario needs to be considered.

Of course it is very, very early to speculate on a big crop but just suppose spring wheat and durum repeated 1992 yields; ending stocks of wheat could climb to around 34 percent of total use if the total use projection remained unchanged. Minneapolis December futures could drop under $2.90. This is the downside price risk.

For corn, USDA projected ending stocks for 2003-2004 to be 13.5 percent of total use. Chicago December futures reflected that stocks/use situation with a $2.40 price as of June 17 which is historically consistent. As with wheat, there is downside price risk if a banner crop is produced.

The one country in the world experiencing corn production problems is China. USDA reduced its production estimate by 4 million metric tons but not its export estimate which had already been reduced to 8 million metric tons from 13.5 million a year ago.

Soybean November futures turned negative on June 13. After establishing a new contract high at $5.88, it traded lower than the previous day low and closed much lower than the previous day close. This was a very distinctive key reversal.

The fundamentals changed very little during the past month. USDA did increase Brazil’s production by 1 million metric tons. The trade was concerned with potential port problems but significant problems never materialized. Beginning U.S. stocks for 2003-2004 were increased by 5 million bushels.

World demand continues to absorb the increasing production of soybeans. Ending stocks continue tight at U.S. and world levels. But, there is a fine line between too little and too much.

Price volatility should create opportunities during forthcoming weeks to implement marketing strategies. Review marketing plans and be prepared to act accordingly.

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Source: George Flaskerud, (701) 231-7377, gflasker@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu