Wheat prices should weaken into the fall months, unless…

KANSAS CITY — Wheat futures prices may, and probably will, decline in the next several weeks, given the prospects for a record corn crop, according to veteran crop analysts. But they cautioned there was underlying support for the wheat market derived from strong world demand and record consumption as well as upside price risk in the event of a weather threat to the fall crops. Flour buyers will have to track fall developments closely.

The U.S. Department of Agriculture on Aug. 12 issued revisions to its 2013-14 forecasts for U.S. and world wheat supply and demand. The U.S.D.A. tightened its forecast for the U.S. wheat carryover on June 1, 2014, by 25 million bus compared with the July outlook because of stronger-than-expected export demand, but the more important adjustments were registered in the world wheat supply-and-demand outlook.

The U.S.D.A. forecast world wheat production in the current year at a record 705.38 million tonnes, up 7.58 million tonnes from the July forecast and up 50.11 million tonnes, or 8%, from 655.27 million tonnes in 2012-13. The current record-large world wheat crop of 697.16 million tonnes was harvested in 2011-12.

Given the continuing growth in the world’s population, record wheat crops should not at all be unusual, but the first world crop to surpass 700 million tonnes nevertheless was bound to be viewed as a milestone. World wheat production first surpassed 600 million tonnes in 1997-98 and 500 million tonnes in 1984-85.

With the U.S. wheat production forecast only narrowly above the July projection, the hike in the world wheat production projection was tied to larger crops in other wheat-exporting countries, including Kazakhstan, Ukraine, the European Union and Canada.

The U.S.D.A. forecast world wheat exports in 2013-14 at 154.01 million tonnes, up 4.88 million tonnes from the July projection and up 11% from 138.71 million tonnes in 2012-13. International trade in wheat still would fall below the record set in 2011-12 at 157.83 million tonnes.

Of particular note, the U.S.D.A. raised its forecast for China’s wheat imports in 2013-14 to 9.5 million tonnes from 8.5 million tonnes as the previous projection and compared with 2.96 million tonnes in 2012-13. China’s wheat imports were forecast to be the highest since 1995-96.

World wheat consumption in 2013-14 was forecast at a record 706.81 million tonnes, up 6.92 million tonnes from the July projection and up 4% from 680.42 million tonnes in 2012-13.

World wheat ending stocks in 2013-14 were forecast at 172.99 million tonnes, up 0.61 million tonnes from the July outlook but down 1.43 million tonnes from 174.42 million tonnes in 2012-13.

Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., Stephenson, Va., noted, “It’s not often in any of the agricultural commodities that you have record world production but are not able to add to the carryover. That’s the underlying bullishness in the wheat market. It doesn’t’ mean prices can’t go lower, but it does suggest if we do run into some production problems in the Southern Hemisphere or as we get into 2014, this tremendous consumption base may magnify the price response.”

Mr. Meyers also pointed to the unexpected large demand for wheat from China.

“China has bought a significant amount of U.S. soft red winter wheat and about 1.5 million tonnes of wheat from Australia,” he said. “If the U.S.D.A. numbers are correct, China still has a lot of buying left to do.”

He said it was quite a change in world wheat markets as China hasn’t been a major importer in several years.

The U.S.D.A. forecast wheat production in the United States in 2013 at 2,114,085,000 bus, up 442,000 bus from the July projection but down 155,032,000 bus, or 7%, from 2,269,117,000 bus in 2012. While the estimate of the hard winter wheat crop at 791 million bus was down slightly from the month before, the estimate for the soft red winter wheat crop, at 542 million bus, was up 1% from July. The forecast for production of spring wheat other than durum at 511 million bus was down narrowly from July and was down 6% from the 2012 outturn.

The U.S.D.A. forecast the 2013-14 wheat supply at 2,962 million bus, unchanged from the July projection but down 5% from 3,134 million bus in 2012-13. Domestic disappearance of wheat in the current year was forecast at 1,311 million bus, unchanged from July with food use of wheat projected at a record 958 million bus, up 13 million bus from 2012-13, and feed and residual use at 280 million bus, down from 390 million bus in the previous year.

U.S. wheat exports in 2013-14 were forecast at 1,100 million bus, up 25 million bus from the July projection, up 93 million bus from 2012-13 and the highest since 1,289 million bus in 2010-11. The China demand was a principal reason for the increased export forecast.

The U.S.D.A. forecast the carryover of wheat in the United States on June 1, 2014 at 551 million bus, down 25 million bus from the July projection and down 23% from 718 million bus in 2013. The June 1 wheat inventory in 2014 would be the smallest since 306 million bus in 2008, which, in turn, was the lowest since 1948.

The recent five-year average June 1 wheat inventory was 791 million bus.

Mr. Meyers said principal market movers for wheat during the next several weeks will be size of the U.S. corn crop, China demand, the Southern Hemisphere wheat crop and the outlook for planting the 2014 U.S. winter wheat crop.

He remarked the U.S.D.A.’s August forecasts for both the corn and soybean crops fell below most trade expectations. He said dryness in areas of the Midwest may pull average corn yield down from the August forecast, and the late start to the growing season raised concerns an early frost may further trim yield prospects.

But barring a weather threat, December corn futures may drop 25c from current levels during the next couple of months, Mr. Meyers said.

“That would have to happen for wheat prices to come down a similar amount,” he said.

The wheat market also will be eying developments in Australia and Argentina, Mr. Meyers said.

“The U.S.D.A. maintains good production forecasts for those countries, but we’ll have to see how they get through their growing seasons,” he said.

A bearish influence on wheat markets was improving soil moisture conditions across key parts of the Southwest, Mr. Meyers said. Kansas Agricultural Statistics indicated in its most recent crop progress report that topsoil moisture across the state was 79% adequate to surplus compared with 4% last year, and subsoil moisture was 65% adequate to surplus compared with 4% in 2012.

“The good precipitation seen in many areas in recent weeks means there should be some decent soil moisture for the fall planting season, which has not been the case in the Southwest in the past couple of years,” Mr. Meyers observed.

Winter wheat acreage should come down a bit from 2013 because in areas where farmers may grow wheat, corn or soybeans, the economics favor the latter two crops over wheat, even given a record corn crop and a large soybean crop.

“But that doesn’t necessarily mean the 2014 winter wheat crop will be smaller than the 2013 outturn,” Mr. Meyers said. “If hard red winter wheat yields rebound, we may harvest more wheat even if acreage does not increase.”

Mr. Meyers indicated he thought the Kansas City December wheat future may drop to $6.60@6.70 a bu during the next three months, with December futures in Chicago dropping to around $6.10@6.20 a bu and Minneapolis futures dropping to around $6.90@7 a bu.

He said bakers may want to consider extending flour coverage through September and into October at current price levels, they may want to begin booking November-December when prices decline to about 25c a bu above his forecast lows.

U.S.D.A. sees record corn crop despite lower-than-expected yield

KANSAS CITY — The U.S. Department of Agriculture on Aug. 12 forecast a record large 2013 U.S. corn crop, albeit below the average of trade expectations, trimmed forecast carryover for this year and next and boosted average price forecasts for both years, while the trade waits to see if mostly favorable weather during the growing season carries into the fall harvest.

In its Aug. 12 Crop Production report, the U.S.D.A. forecast 2013 U.S. corn production at 13,763 million bus, up 28% from the drought-reduced 2012 crop of 10,780 million bus and 13% above the five-year average crop size of 12,159 million bus. If realized, the 2013 crop would top the 2009 record of 13,092 million bus by 5%. It was the first U.S.D.A. survey-based forecast of the season for corn, soybeans and other row crops.

Based on Aug. 1 conditions, average corn yield was forecast at 154.4 bus an acre, up 31 bus from 123.4 bus an acre in 2012 and the highest average yield since the record 164.7 bus an acre in 2009, the U.S.D.A. said.

“The forecasted yield for the United States is expected to be the third highest on record, behind only 2009 and 2004,” the U.S.D.A. said. “Fourteen states expect a record high corn yield for 2013.”

Harvested area was forecast at 89.1 million acres, unchanged from the June Acreage report but up 2% from 87.4 million acres in 2012. Planted area of 97.4 million acres was unchanged from June and the highest since 102 million acres in 1936.

The U.S.D.A. production number was below the average pre-report trade estimate of 14,005 million bus, and the yield was below the trade average of 157.7 bus an acre.

Corn futures traded modestly higher the day of the report, touching $4.80 a bu in the nearby September contract, but gave back all of those gains and then some the next day (Aug. 13), trading near three-year lows, around $4.50 a bu as in the prior week, only to turn higher again at midweek. In contrast, nearby corn futures traded at record highs above $8 a bu for most of August 2012.

In its Aug. 12 World Agricultural Supply and Demand Estimates, the U.S.D.A. projected corn carryover on Sept. 1, 2014, at 1,837 million bus, down 122 million bus, or 6%, from the July projection but up 1,118 million bus, or 155%, from 719 million bus in 2013, with the latter reduced 10 million bus from July based on a 5-million-bu increase in imports more than offset by a 15-million-bu increase in forecast exports.

The U.S.D.A. carryover was below the average trade expectations of 1,970 million bus for 2014 and 724 million bus for 2013.

The lower carryover in 2014 was the result of reduced beginning stocks (719 million bus) and production (13,763 million bus, down 187 million bus from the July projection that was based on trend yields) more than offsetting reduced food and seed use and exports in 2013-14. Total corn supply in 2013-14 was projected at 14,512 million bus, down 197 million bus, or 1%, from July but up 2,578 million bus, or 22%, from 11,934 million bus in 2012-13.

Total corn use was projected at 12,675 million bus, down 75 million bus from the July projection but up 1,460 million bus, or 13%, from 2012-13. Use of corn for ethanol was unchanged from July at 4,900 million bus (up 250 million bus from 2012-13 but down 111 million bus from 2011-12) with food and seed use unchanged from July at 1,450 million bus (up 50 million bus from the prior year). Feed use was projected at 5,100 million bus, down 50 million bus from July but up 650 million bus, or 15%, from this year. Exports were projected at 1,225 million bus in 2013-14, down 25 million bus from July but up 510 million bus, or 71%, from 715 million bus in 2012-13.

The U.S.D.A. honed its 2012-13 (which ends Aug. 31) average farm price estimate to $6.90@7 a bu, compared with $6.75@7.15 a bu in July and $6.22 in 2011-12. The average 2013-14 price was projected to range from $4.50@5.30 a bu. Corn has averaged over $5 a bu since 2010-11 but had averaged above $4 a bu only twice in history prior to that.

“Prices received by farmers are expected to remain above cash bid levels through the fall as producers who forward-priced corn earlier in the year support the weighted average farm-gate price,” the U.S.D.A. said.

Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., Stephenson, Va., said he sees nearby corn futures prices averaging in the $4.35@4.75 a bu range during the fourth quarter, with the December contract dipping to a low around $4.25 a bu. There may be a 10@20c a bu bump in the first half of 2014, but prices may trend even lower in the fall of next year as stocks continue to build, he said, forecasting corn futures prices to average “sub $5 a bu” for the next 12 months if the Aug. 12 U.S.D.A. estimates are close. But he offered words of caution.

“We still have to deal with dryness in parts of the Corn Belt,” Mr. Meyers added. “And we need at least normal first frost dates in the Upper Midwest.”

Moisture conditions are significantly better than a year ago, reflected in part by the latest U.S.D.A. Crop Progress report that showed corn rated good to excellent at 64% in the 18 major states as of Aug. 11, compared with 23% at the same time last year, with 11% of the crop rated poor to very poor compared with 51% last year.

Although no one foresees a weather disaster like last year’s drought, there still is concern that weather may trim corn production from the current estimate.

“I think the crop is going to get a little bit smaller,” said David Salmon, owner of Weather Derivatives, an agricultural and energy weather consulting service in Belton, Mo. “The crop ratings are as good as they are going to get.”

“Coolness has kept the crop from looking shabby,” Mr. Salmon said, noting pockets of dryness mostly in parts of the western and central Corn Belt and in parts of the Upper Midwest. A warm-up the last half of August across much of the northern half of the United States will bring more of those dry conditions to light, he said, but the crop has progressed too far to be significantly hurt, and the warm weather will be good for the late developing crop in the Upper Midwest.

Mr. Salmon also sees limited prospects for an early frost, even though the northern most states showed the slowest crop development, with corn in the dough stage as of Aug. 11 at 12% in Wisconsin (27% as average for the date), 7% in Minnesota (27%) and 10% in North Dakota (27%). The late-August warm-up and improved moisture conditions (relative to last year) reduce the likelihood of early frost, he said.

Much of the uncertainty about the corn crop was based on the demand side, Mr. Meyers said. He sees the U.S.D.A. corn use numbers as “too optimistic,” while the supply side is “fairly well known.” Projected 2013-14 corn used for feed and ethanol as well as exports may go down, he suggested. Exports to China, projected at 7 million tonnes from all sources in 2013-14, may move higher because of low U.S. corn prices, but it’s “still not bullish,” he said.

The cash basis on corn likely will stay strong for another four to six weeks because of tight old crop supplies, Mr. Meyers said, but the strong basis will “go away” once the 18-state harvest total reaches 15% to 20%. The harvest already was under way in southern states.

“There is still plenty of corn,” Mr. Meyers said. “I would characterize the market as bearish, but not overly bearish.”