Continued strength in overseas demand, in the face of strong prices for the three major U.S. crops, prompted the U.S. Department of Agriculture (USDA) to increase its export forecasts on the December update this week. With no U.S. production updates this month, these higher demand levels further tighten U.S. wheat and soybean ending stocks-and lowered corn's adequate supply situation slightly.
A record U.S. crushing pace and China becoming a stronger buyer recently prompted the USDA to raise both the crush and export forecasts by 5 and 20 million bu. respectively for 2007/'08 this month. This 25 million bu. increase dropped this year's ending stocks projection to 185 million bu.-the lowest since the 2003/'04 crop's 112 million final stocks. The USDA didn't change its South American crop estimates, but did decrease Argentina's beginning stocks and increased world demand-which tightened soybean world stocks by 2 mmt to 47.3 mmt. Under these tight conditions, traders will closely follow South America's growing season and this year's La Niña in the Pacific Ocean. This is prompting concerns about Argentina's crop, which has already been impacted by some bouts of coldness and dryness so far this season.
The USDA also increased its foreign sales estimate for corn to 2.45 billion bu. this month (up 100 million), because this year's pace is 370 million ahead of last year (when 2.125 billion was exported). And high wheat prices are cutting the feeding of this crop as buyers switch to coarse grains. Corn's U.S. supplies remain adequate at 1.8 billion bu. But the tendency for lower final U.S. crops, after declining yields during the Fall and recent Congressional action to increase 2008 RFS levels to 8.5 billion to 9 billion gallons, have lent support to this market.
U.S. wheat exports were raised 25 million bu., reflecting several factors: (1) Argentina closing its wheat exports because of concerns over a freeze last month; (2) supply nervousness from India and others trying to build buffer stocks; and (3) current sales are only 115 million bu. below the USDA's 1.15 billion estimate, with six months to go in this marketing year. However, world wheat stocks were left at 110 mmt (similar to last month), as Argentina still appears likely to produce a 15 mmt crop near output in 2006. Dryness in the Southwest U.S. wheat belt has likely added to wheat's price recovery, but this week's unfortunate ice storm has improved this region's soil moisture.
In soybeans, the fight for 2008 U.S acres and South America's growing season concerns will provide price support this winter. But producers should still price 65% of old crop and 25% of new crop current levels because of possible year-end price volatility from profit taking. With old-crop corn supplies sizable and December 2008 prices keeping many Midwest acres in corn, producers should have 2007/'08 sales at 75% and 2008/'09 marketing at 35%. Expanding U.S and world wheat plantings and recent Plains moisture suggests wheat producers should also have 50%-60% of 2008 output priced or hedged, and 20%-25% of July 2009 hedged with prices at $8 and $7.50 respectively.
The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.
