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June
15, 2006
Market Advisor:
Adjust Marketing Plan to USDA Report and Crop Conditions
By George
Flaskerud, Crops Economist
NDSU Extension Service
The USDA released its latest
supply-and-demand report on June 9. The stocks/use ratios decreased for
wheat and corn relative to a month ago, but increased slightly for soybeans.
Relative to trade expectations, ending stocks of wheat, corn and soybeans
were well within the ranges of estimates, but a little below the averages.
Since the findings were anticipated, the report’s impact on prices
should be minimal and the market’s attention should return to growing
conditions around the world.
The good/excellent ratings were favorable as of June 4 for all U.S. crops
except winter wheat. The rating only was 27 percent for winter wheat (down
1 percent for the week), 69 percent for spring wheat (down 4 percent),
74 percent for barley (down 2 percent), 71 percent for corn (up 1 percent)
and 70 percent for soybeans (initial rating).
Saskatchewan crop conditions
as of June 4 also were very favorable for spring wheat and durum, with
88 percent rated good/excellent, according to Saskatchewan Ag and Food.
Although the ratings were good as of June 4, concerns about dry conditions
across parts of North Dakota began surfacing after the report was released.
Given the favorable ratings, Minneapolis December wheat futures set a
high in May at $5.01, which was $1.36 more than the November low and closed
at $4.73 on June 8. December corn futures reached a high in May of $2.87,
which was 49 cents more than the December low, and closed at $2.71 on
June 8. November soybean futures have traded between $5.75 and $6.48 since
last November and closed at $6.16 on June 8 after reaching a May high
of $6.39.
The USDA projected a 2006-07 seasonal average farm wheat price of $3.60
to $4.20 per bushel or 10 cents above a month ago. For corn and soybeans,
the projections were left the same as last month at $2.25 to $2.65 and
$5.10 to $6.10, respectively.
Consider making additional preharvest sales on rallies at least above
June 8 price levels, especially if few sales have been made and northern
Plains growing conditions continue to be favorable. Although prices have
come off their highs, they still are fairly good relative to the USDA’s
projected seasonal prices. Futures prices at June 8 levels should result
in cash prices that are at least at the midrange of USDA projections adjusted
to North Dakota.
Conversely, consider buying wheat and corn call options on market weakness,
especially if substantial preharvest sales already have been made. Weather
and the outlook for a tightening level of stocks have the potential to
drive prices higher. September calls three strikes out of the money on
June 8 would have cost 15 cents per bushel for Minneapolis wheat and 8
cents for corn. Soybeans are left out of this strategy because the outlook
is for ample stocks. The potential for weaker prices may be greater for
wheat than corn because substantial winter wheat harvest sales are likely
due to relatively strong prices.
Changes in the 2006-07 balance sheet for wheat reduced the stocks/use
ratio from 21.6 percent in May to 20.3 percent in June versus 25.1 percent
a year ago. During the past month, projections of planted and harvest
wheat acres remained the same, but the yield per harvested acre was reduced
from 40.6 to 39.3, reflecting a hard red winter wheat production estimate
that was reduced by approximately 8 percent. The decrease in production
that resulted was partly offset by a decrease in feed and residual use.
Although 2005-06 all-wheat ending stocks remained unchanged from last
month, changes were made by class (increased for hard red winter and soft
red winter, but reduced for the others). Projections for 2006-07 spring
wheat, durum and the other classes will be reported on July 12.
The 2006-07 wheat export projection was left the same as a month ago at
900 million bushels, although exports are expected to be down 100 million
bushels from a year ago because of limited supplies and higher prices.
World wheat trade is expected to be about the same as a year ago, although
reduced imports are projected for North Africa (bad news, especially for
durum), the EU-25 and the wheat-feeding countries of South Korea, Israel
and the Philippines (limited supplies of low-quality wheat). The reduced
imports are expected to be offset by increased imports by India. The Ukraine
and Russia are expected to export considerably less because of production
problems. Increased exports are expected by the EU-25, Canada, Argentina,
Australia and Kazakhstan. Australia needs to be watched because it is
experiencing some dry conditions.
World ending stocks for 2006-07 wheat were left nearly unchanged from
a month ago, but are down about 11 percent from a year ago. Low ending
stocks are likely to contribute to wheat price volatility throughout the
year. At 128 million tons, ending stocks are projected to be the second
lowest in 25 years.
For corn, the only change in
the 2006-07 balance sheet from a month ago is a 50 million bushel decrease
in beginning stocks. Corn use is expected to be a record because of increased
ethanol production and increased exports relative to a year ago. Corn
use for ethanol is expected to increase 34 percent, which follows a 21
percent increase last year. Exports are expected to be the highest since
1994 to 1995 because of less competition from Argentina, China, South
Africa and feed-quality wheat. As a result of record use, stocks are getting
tighter, with a stocks/use ratio of 9.4 percent projected versus 9.8 percent
last month and 20.2 percent a year ago.
Barley and oats each had a 5 million bushel increase in beginning stocks,
which was the only change in their 2006-07 balance sheets relative to
a month ago. Seasonal average prices of $2.45 to $2.85 and $1.60 to $2
were projected for barley and oats, respectively.
Global coarse-grain ending stocks for 2006-07 are expected to decrease
significantly from a year ago (24 percent), but remain essentially unchanged
from last month. A stocks/use ratio of 13 percent is projected versus
17.5 percent a year ago. China is expected to continue being a net exporter
of coarse grain. Although China’s coarse-grain ending stocks have
been drawn down sharply during the last few years, they still are expected
to have more than two months of use on hand.
For soybeans, a 5 million bushel increase in beginning stocks was the
only 2006-07 balance sheet change from a month ago. The soybean crush
is projected to be a record and exports are projected to be just short
of the 2004-05 record, so the stocks/use ratio is expected to be 21.8
percent versus 21.7 percent a month ago and 20.5 percent a year ago.
Helping U.S. exports and soybean prices was a smaller-than-expected Brazilian
crop. The 2005-06 production estimate for Brazil was reduced to 55.7 million
metric tons from 56.5 million a month ago.
Use of soybean oil for biodiesel is growing and becoming a more significant
component of crush. There are at least 65 biodiesel plants operating,
according to the USDA. During the next 18 months, another 50 plants under
construction or planned could more than double U.S. production. The USDA’s
projected 2006-07 domestic use of soybean oil is approximately 6 percent
higher than a year ago and 9 percent higher than two years ago. The high
level of use is expected to reduce the substantial inventory of soy oil,
although it is expected to remain higher than two years ago. The result
is fairly strong soy oil prices relative to the level of stocks on hand.
The USDA is projecting a soybean oil seasonal price of $22.50 to $26.50
versus $23.25 last year and $23.01 two years ago.
Strong soybean oil prices should help sunflower and canola prices, which
are benefiting from supply-and-demand situations. As of June 7, NuSun
bids at Enderlin were $10.25 per hundredweight for old crop and $11.50
for new crop. Canola bids at Velva were $11.14 per hundredweight for June
and $11.27 for October/November.
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Source:
George Flaskerud, (701) 231-7377, gflasker@ndsuext.nodak.edu
Editor: Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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