2007 grains off to an impressive start

By Ray Grabanski, Market Watch
Friday, May 25, 2007 3:34 PM CDT

Wheat

Wheat futures struggled last week; and rightfully so considering bearish domestic forecasts, improving crop conditions and impending winter wheat harvest. Early April concerns surrounding crop damage have evaporated, as weather since then has been anything but harmful.

As we get nearer and nearer harvest for winter wheat, there is every indication that not only are we looking at a sharp increase in harvested area, but also at a potentially large yield on those acres. This should more than satisfy any domestic demand for wheat, both on a feed and milling basis, but also comes at a time when export sales have been less than amazing.

The USDA weekly crop progress report for the week ending May 13 was perhaps the most bearish report yet as it combined improving winter wheat conditions with a HRS wheat crop that is now well ahead of average planting progress. Planting progress is estimated at 87 percent complete, well ahead of average progress of 74 percent (even more amazing considering we were once behind). Emergence was reported at 51 percent, also ahead of the five year average of 43 percent. Crop conditions were issued for the first time at 79 percent g/ex, 20 percent fair, and 1 percent p/vp. There was no comparable rating, but initial Progressive Ag yield models have started at a very impressive 39.1 bu/ac, 1.5 bu above average.

Winter wheat conditions continued to improve by 1 percent to 58 percent g/ex, 25 percent fair, and 17 percent p/vp. This boosted yield models by another .5 bu to 47.66, just behind the record large number seen in 1999. Given this information and the good weather forecasts, USDA will need to make dramatic changes in their 2007 crop production and S&D data, hiking future production reports by up to 10 percent.

USDA export sales were reported at 397,200 metric tons, in the middle of trade expectations. However, this is down sharply from the prior week and offers no help in catching up to projected USDA pace. With the end of the 2006 marketing year rapidly approaching, Pro Ag expects USDA could adjust export projections lower by as much as 25 mbu, boosting carryout stocks by an equal amount. On a positive note, USDA did announce a sale of 200,000 mt of 2007/2008 wheat to Iraq.

There are very few positive developments to note about wheat markets. The most notable may be USDA's projected world ending stocks, which continue to suggest growing demand for coarse grains and a lower world stock estimate. Domestically however, record yields and slow exports add up to low prices. Support right now likely coming only from high corn and soybean markets. It says little for U.S. wheat demand that we could not gain market share this past year, even with production disasters in major player exporters. As we mentioned, forecasts show little threat to winter wheat and offer every benefit to spring wheat, leading us to call the market lower over the next few weeks.

Corn

Corn futures finished steady to slightly higher on the week but went though series of ups and downs to get there. For all that volatility, there was very little change in fundamentals or technicals, especially on the bullish side.

The week started out lower in anticipation of strong planting progress, which was confirmed in the Crop Progress report. Contrarily, the markets actually moved higher in spite of that news before private acreage estimates showed increased corn acres (150,000 acres) over the amount initially forecasted by USDA on March 30 acreage intentions report. This is due to replant of some frost damaged winter wheat acres, but still reminds us of the fact that good weather could give us some huge supplies at the end of the 2007 production season. Technically, we remained within a nearly 3 month long trading range between $3.60 and $4 December the bottom side of which should be tested more and more often in the next few weeks.

USDA Crop Progress reports were released and, for the first time this year, planting progress was even with average pace (78 percent) and emergence slightly ahead (39 percent vs. 36 percent average). This is a bearish development as it reflects the excellent weather patterns of the past few weeks, a trend that is not forecasted to change much in the near term. The move is even more bearish when one considers that only three weeks ago we were nearly a week behind. It looks like this years crop is off to a great start.

USDA export sales numbers for the week ending May 10 showed sales totaled 1.8 mmt, well above trade expectations as well as the prior week's total.

The outlook for this year's crop is becoming more and more clear, but that doesn't necessarily bode well for producers. While it is still early in the season and there will undoubtedly be some sort of weather scare to come, the crop is off to an excellent start.

Early season also saw several in the trade ask whether or not U.S. producers could plant so many corn acres in a reasonable amount of time, and we seem to have answered that question as well. So that leaves two big questions: Will weather hold up as well as it has, and more importantly, how will corn demand for ethanol hold up through the end of the year? The trade will revolve around this second question and it is likely the sole reason we have not yet traded through technical support at $3.60.

Crude prices remain well above $60/barrel and ethanol plants are still making money. Pro Ag suspects that even USDA does not have a true handle on the current growth of this industry, leaving us open to huge volatility through the summer season.

Soybeans

Soybean futures moved high enough to test resistance before settling the week on a quiet note. Much of the strength was spillover from last week's USDA report, but the ability to retain these gains came from strong soyoil and palm oil markets as well as renewed fund interest in owning this commodity.

USDA reports confirmed long suspected situations of sharply lowered soybean production, which in and of itself is not overly friendly given the huge stocks currently on hand. However, increasing demand for crush and vegetable oil and potential acreage battles in upcoming production years do give soybeans the edge in today's grain market. Funds took note of this by midweek, and we now sit even with the highs posted just after the March 30 acreage intentions report. Ability to break resistance so early in the season could be questionable, but remember not to underestimate the power of these speculative market forces.

USDA Crop Progress reports for the week ending May 13 were bearish for soybeans as planting progress is now ahead of pace. USDA estimates the U.S. soybean crop to be 32 percent planted against an average pace of 31 percent.

USDA weekly export sales for the week ending May 10 noted sales were 358,000 mt, and above trade expectations. Despite the seasonal slowdown, year to date pace has been strong and it is possible we could see USDA raise export projections by year end.

As we stated above, soybeans are the grain that offer the most potential heading into future production years and are also the grain that we have been most conservative in our sales of. As with corn and HRS wheat, we are early in the production year but it looks like we are off to a stellar start. However, sharply lower planted acres and burgeoning demand for soyoil will allow today's record carryout stocks to drawdown sharply by the end of the 2007 crop year. The drawdown in supply will also cause markets to have to bid in order to buy acres away from corn in 2008 (could be very interesting if ethanol demand does not dwindle).

Shorter term, world vegetable oil markets are also running to new highs, which could cause renewed speculative interest in soybean futures.

Barley

USDA released their weekly updates on crop condition and progress, and as we have seen in recent week, it appears the barley crop is off to an excellent start. The U.S. crop is reported at 87 percent planted, ahead of the five year average of 72 percent and last year's pace of 74 percent. Emergence is also 13 percent ahead of average at 52 percent.

Progress by state in the region is as follows: Minnesota 92 percent planted, 43 percent emerged (73 percent and 34 percent average); Montana 85 percent planted, 48 percent emerged (75 percent and 39 percent average); North Dakota 86 percent planted, 44 percent emerged (59 percent and 27 percent average).

Feed grains in general appear to be off to an excellent start and it's difficult to see a reason to push prices higher at this time.

Durum

USDA released crop progress reports for the week ending May 13. It appears that wheat in general is off to a very nice start, with HRS progress now far ahead of average and showing potential for above trendline yields. For durum in particular, planting in North Dakota is reported at 56 percent complete and 23 percent emerged, well ahead of the five year average of 39 percent and 17 percent respectively. While the market should get some support from Stats Canada report showing strong draw downs of durum stocks, pressure in HRS markets and the impressive start to the year will limit upside potential.

Minor oilseeds

Canola futures closed higher the week as soyoil and vegetable oil markets continue their run away higher. The recent push has been largely connected to an EU initiative mandating a higher biodiesel blend, but the push behind biofuels in general has kept a floor under oilseeds. USDA released crop progress reports for the week ending May 13, and as with all crops, canola appears to be off on a runaway start. North Dakota is reported at 82 percent planted and 34 percent emerged, well ahead of the five year average of 50 percent planted and 14 percent emerged.

Exporter interest has also been increasing, and buyer pricing has added an additional supportive element.

The year has officially begun for other minor oilseeds, with USDA finally releasing crop progress data for the week ending May 13. Not only is canola off to a fast start in 2007, but flax and sunflower are also running ahead. Sunflower planting progress is reported at 6 percent complete, ahead of the 4 percent average for this time of year.

North Dakota flax is 47 percent planted and 11 percent emerged, ahead of averages of 35 percent planted at 7 percent emerged.

Comments »

Comment on this story

Comments will be approved within 48 hours

Name:

Email: (optional)

Comments:

Image Verification: (Case sensitive)