USDA released its monthly World Agricultural Supply and Demand Estimates (WASDE) last Friday. Because the January WASDE report typically includes the final production estimates for the U.S. corn and soybean crops, very few domestic supply changes are anticipated in the February report and the focus turns to domestic consumption and South American production. With dry weather prevailing in Argentina and beneficial rains in Brazil, expectations for lower corn and soybean production in Argentina and higher production in Brazil were met.

Prior to USDA’s report being released, Conab (the Brazilian government’s crop agency) raised its forecast for 2012/13 soybean production to 83.4 MMT. USDA estimated Brazil’s soybean 83.5 MMT, in line with Conab’s forecast.  Due to beneficial rains over the last several weeks in the central and western growing areas of Brazil, analysts and traders expected USDA to increase Brazilian soybean forecast from its 82.5 MMT forecast last month. The 1 MMT increase USDA made was larger than expected. In fact, the 83.5 MMT soybean forecast, if realized, would be a record large production for the country and 17 MMT higher than last year when drought lowered yields. The 83.5 MMT production is equivalent to 3.068 billion bushels of soybeans, which is 53 million more bushels of soybeans than the U.S. raised in 2012. This will mark the first time that Brazil soybean production has surpassed U.S. production.

It appears world soybean buyers are poised and waiting for the Brazilian supply of soybeans. While U.S. soybean prices rose over the last few weeks and exports remain robust, prices were softening by the middle of last week as Brazil moved into early harvest of soybeans. The number of vessels at Brazilian ports increased by more than 60% in the last week. However, rainfall is slowing early soybean harvest at this point. Further, Brazil continues to struggle with its rural infrastructure and movement of soybeans to ocean ports is a lengthy process. And, as is typical at this time of year, rumors of strikes amongst dockworkers indicate another possible slow-down in Brazilian shipments.

While USDA’s soybean forecast for Argentina’s soybean production of 53 MMT was close to expectations and was 1 MMT lower than last month’s forecast, it remains 13 MMT higher than last year. The increases in Argentine and Brazilian soybean production contributed to a 5 MMT year-over-year increase in world ending stocks for the 2012/13 marketing year. And, that’s despite a reduction in U.S. ending stocks of 1.21 MMT (44 million bushels) since last year. In fact, USDA lowered domestic ending stocks by 10 million bushels since last month’s estimate, resulting in the stocks-to-use ratio tightening to 4%. While all of this ending stock reduction was accomplished through an increase in crush use, the trade was somewhat disappointed that exports weren’t increased in February’s WASDE report.

The soybean figures in the WASDE report seem to confirm that world buyers are ready to shift to South American soybeans as soon as they are available. Thus, the window for U.S. farmer marketing of soybeans at the higher prices available in the last couple of weeks is drawing to an end soon (and may have already ended). While another rally in the soybean market is possible during the summer growing season if the U.S. weather is unfavorable and the very tight stocks-to-use ratio will continue to support prices, soybean prices will likely decline over the next several weeks during the South American harvest. Nearby soybean futures closed $0.34/bu lower following the report’s release last Friday.

On the corn side, USDA’s estimates for Argentina’s and Brazil’s crops were higher than pre-release expectations. USDA forecasts the Brazilian corn crop to be 72.5 MMT, compared to an average pre-release expectation of 71.3 MMT. That’s a 1.5 MMT increase since last month, reflecting larger acreage and higher yields for the first-season crop and expectations for a good second-season crop. USDA lowered Argentina’s corn production by 1 MMT since last month to 27 MMT. Despite that decrease, it is still 6 MMT more than a year ago. However, USDA increased corn production in Mexico, India, and Ukraine, in addition to Brazil, so that global corn production increased by 2.1 MMT since last month. As a result, world ending stocks increased by just over 2 MMT.

A 30 million bushel increase to U.S. ending stocks also contributed to the increase in world stocks. Though USDA increased non-ethanol industrial use of corn by 20 million bushels, exports were lowered 50 million bushels, consistent with the very slow export pace so far this marketing year. As a result, the domestic ending stocks-to-use ratio increased from 5.3% to 5.6%.

Looking Ahead to 2013/14

Domestic corn and soybean ending stocks remain very tight for the 2012/13 marketing year, which increases domestic and world users’ reliance on the crop that will be planted this spring (for the 2013/14 marketing year). As a result, the market will be highly sensitive to acreages and yields throughout the spring and summer months. USDA doesn’t publish its first WASDE balance sheet for the 2013/14 marketing year until May. However, several initial key pieces of information will shed some light on those first production forecasts for this next marketing year. This past week, the Congressional Budget Office (CBO) released its production and ending stocks forecasts for this next marketing year. Although these CBO numbers were estimated last fall, they do reflect some of the trendline forecasts that USDA will likely use in its forecasts to come. The CBO expects 97 million acres of corn to be planted and national yield to average 161.5 bushels per acre, for a total production of 14.454 billion bushels in 2013. It projects 2013/14 ending stocks at 1.852 billion bushels, nearly three times higher than 2012/13 ending stocks. The CBO projected 77 million acres of soybeans to be planted in 2013. With an average yield of 43.5 bushels per acre, total production would then be 3.306 billion bushels. CBO estimated the 2013/14 soybean ending stocks to be 281 million bushels, about 2.2 times larger than this year.

These early estimates, along with many private analysts’ forecasts, indicate supplies will increase and prices will decrease this next year – provided average weather during the growing season. Granted, that is a big “if,” but it does suggest how quickly the supply and demand balance can change. Look for more early forecasts from USDA on February 21-22 as it convenes its annual agricultural outlook forum. Then, NASS will present its Prospective Plantings report on March 28. All of these forecasts could effect market prices, but likely not as much as the actual weather this year.

Source: Darrell Mark

The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information.  There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.