June 13, 2008

It’s All About Corn

Well, for now we can forget about the huge US wheat crop trying to be harvested, or the record large (and growing) world wheat crop in its early stages of harvest. When normally wheat prices would be buckling under the weight of harvest pressure, they are instead surging higher from the support of an unleashed corn market.

The rains and floods have just been too much for the Midwest and we are seeing corn and bean acreage wash away before our eyes. It’s simply getting too late to plant corn and really for soybeans, too. But beans might still be able to produce a respectable yield that could work at $15. While corn has a substitute in wheat, beans have few alternatives and they could well be the next to surge to new all-time highs as the weather continues to hammer.

And wheat will, indeed, see a surging demand base as it filters more bushels into the feed channel. Thank goodness the US and the world have a big wheat crop to fall upon. And therein lies some of the consternation - it’s not harvested yet. And now the rains are falling again on wheat country while the combines are trying to roll. Along with the rains, there are pockets of hail, tornadoes and just about anything else one wouldn’t want when trying to harvest.

And so, memories of a rain ravaged wheat harvest from last year pop back into our minds, with new memories of rain ravaged plantings just next door stoking the fears of another very challenging growing season. While the odds are still in favor of a mostly normal harvest, and despite a massive world wheat crop coming, we just cannot ignore the impact the corn issues will have on wheat prices. This week it was made very clear that wheat can and will follow corn higher, even if it is during the most negative seasonal time period of the year.

The harvest is making its way into southern KS, where we see yields continue to be better than expected, along with better protein levels. OK’s protein is coming in around 11.0; however, KS early cutting is showing pro around 12.5. If that quality level continues, it should more than offset the lower quality from further south.

Ukraine reported this week that their grain exports will triple this year over last year. Of course, last year, they had drought which led to export restrictions. They estimate they will export 7 MMT of wheat, which compares to USDA’s latest estimate also of 7. According to USDA’s projections, the Black Sea is slated to export 26 MMT of wheat, and the US is projected to export 27 MMT. If nothing else, this will be a very interesting year to watch those export numbers; the only time they’ve out-exported the US was in ‘02/03 where they clipped us by 2.7 MMT. The Black Sea is notorious for undercutting anyone at anytime in wheat sales. This year, they’ve certainly got the supplies to be aggressive. On the other hand, the US has a very weak dollar which makes us more competitive, but transport costs will kill us. Plus, we’ll be pulling significant wheat supplies into the feed channel, potentially keeping our domestic prices too high for much of the export market.

USDA issued their monthly S&D’s on Tuesday, with plenty of numbers to crunch (and ultimately adjust) as weather is changing the outlook significantly. US wheat production was estimated at 2.432 billion bushels, 40 million higher than last month and the largest since ‘98/99. Most likely, if weather cooperates with harvest, that number will grow as winter wheat yields so far have been much better than expected and growing conditions for most US regions of both winter and spring wheat have been very good. Feed usage was increased 25 million from last month and 195 from last year; that figure will likely increase as well. Ending stocks were projected to be 487 million bushels, up 4 from last month and 233 from last year.

World wheat production was increased 7 MMT over last month, much of that coming from China who increased last year’s production 4 MMT and then increased this year’s estimate 5 MMT. China is in the middle of their winter wheat harvest, with very problems so far. Their estimated wheat crop of 114 MMT would be their second largest in history, while the estimated corn crop of 153 MMT would be their largest in history. (It is interesting to note that despite China looking at a record corn crop, they have said that they will not be exporters this year as they will keep supplies at home to combat food inflation and to use for their own meat production. In recent years, China has been the US’s biggest competitor in the corn export market.)

World wheat ending stocks are projected at 132 MMT, up 8 from last month, 17 from last year and 8 higher than the year before. It is quite possible that world wheat production, too, will grow as the harvest progresses as most major producing regions have had very good seasons; except for Northwest Africa and the Middle East, markets that no doubt will be aggressively targeted by the Black Sea.

As for corn and beans, the crop report did take corn yields down 5.0 bu/acre to 148.9, with more reductions certainly on the way, not to mention lower acres. Bean yields and acres were left unchanged, but reductions are certainly on their way there as well.

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