Grain prices soared Aug. 12 after the United States Department of
Agriculture slashed production estimates for wheat, corn and soybeans.
The cuts were deeper than expected.
Corn took the biggest hit. Intense heat and dryness as the crop
pollinated sapped its yield potential and now USDA expects production
of 225.72 million tonnes, about five million less than expected and the
smallest since 1995.
U.S. soybean production was set at 71.53 million tonnes, about 2.4
million tonnes below the trade’s guess and the smallest since 1996.
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Spring wheat production was forecast at 12.19 million tonnes, down
eight percent from last month and 13 percent below 2001. The total U.S.
wheat estimate was 45.89 million tonnes, the smallest since 1972.
U.S durum production was set at 2.16 million tonnes, down five percent
from last month and 2001.
These cuts came on the heels of the Canadian Wheat Board’s forecast of
the smallest milling wheat crop since 1974 and the smallest barley crop
since 1968.
While it still hasn’t cut the Canadian and Australian crops as much as
domestic forecasts have, USDA knocked 2002-03 year-end carryout figure
down to 138.75 million, a drop of about nine million tonnes.
Analysts were astounded.
“It’s been quite an exciting morning,” said Rich Feltes, research
director for trade house Refco Inc..
“It’s an understatement to say this is the crop production report of
the decade and the prospect for additional declines in production are
very real.”
The USDA numbers were critical to keeping Canadian grain prices moving
higher. Canola, barley and wheat values are already strong due to the
drought that has covered large parts of Alberta and Saskatchewan, but a
sustained move higher depended on a tight world supply.
This report puts the market psychology strongly in the bull category.
Will it stay there?
Soybeans yields could still improve a little with rain. But corn’s
yield is largely locked in.
Beyond the U.S., traders will eagerly watch soybean seeding estimates
in Brazil and Argentina to see how much acreage jumps in response to
the higher prices.
It is a different story for wheat. Crops in Australia and Argentina are
mostly in the ground so there is not much chance of unexpected
production. The high price could spur more American winter wheat acres,
but that region is the heart of the U.S. drought area and unless there
is a change to wetter weather, farmers might not want to risk seeding.
And the whole story of the European wheat crop is not yet written.
Heavy rain hit many parts of central and eastern Europe on the weekend.
German crop analysts expect a significant portion of the wheat crop
will be fit only for feed. This information was too recent to make it
into the USDA estimates.
Turning to the demand side of the equation, some analysts note the
drought gripping the central U.S. plains has caused producers to cull
their herds as Canadian producers have. This should lower demand for
corn.
Also, China is expected to have significant corn stocks available for
export, increasing competition.
Generally, analysts wonder if higher grain prices will stifle demand.
Maybe not. The chair of the Chinese Cereals and Oils Association told
Reuters he expects that country will finally clear up its rules on
importing genetically modified crops and double the pace of soybean
purchases in the second half of the year.
It seems that anyone fortunate enough to have a crop will enjoy great
prices and the market will have to stay high into next year to rebuild
stocks.
