The rally following the U.S. Department of Agriculture supply and demand report Oct. 11 was a one day wonder.
There might be some minor revisions to grain supply in future reports, particularly in wheat, but the USDA October report marks the point where the narrative in the market shifts from a supply focus to a concentration on demand.
Here are a few of the USDA’s numbers.
It pegged the U.S. corn crop at 10.7 billion bushels, above analysts’ average pre-report estimate. However, the USDA also reduced its corn carry-in amount, reducing the total amount available and keeping its domestic demand fairly steady.
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The net result was a forecast for year-end stocks of only 619 million bu., less than what traders expected.
It was a similar story in soybeans, with the USDA increasing the crop estimate but reducing the year-end stocks forecast because it thinks the market will easily absorb a slight increase in U.S production.
Essentially, the USDA said that there is still good demand despite high grain prices. The next day, the department reported weekly export figures that showed almost no corn exports. There was also talk that American livestock feeders had signed a deal to import Argentine corn.
So the market thinking shifted. There might be good demand at high prices as the USDA indicated, but the sky is not the limit. If prices get too high, demand for American corn will fall off and foreign corn will come into the country.
The story in soybeans, and for canola prices because of the close connection between the two oilseeds, will also be demand.
U.S. soybeans are the only game in town until the South American crop is harvested next year. China will buy and the price will be supported. If demand increases significantly, the price could rally by a dollar or so but then retreat again.
Downward pressure will mount if, as it appears now, Brazil and Argentina harvest record breaking crops.
In wheat, the story is not all about demand. There is still a supply story in the deteriorating condition of the Australian crop.
The USDA lowered its Australian forecast three million tonnes to 23 million, but that is likely generous. The department’s 11.5 million tonne forecast for Argentine wheat might also be high.
Investment bank Goldman Sachs estimates the Australian crop at 21 million tonnes. The Buenos Aires grains exchange last week pegged the Argentine wheat crop at 10.12 million tonnes, noting that excess rain in key growing area had flooded fields.
The USDA lowered world ending stocks to 173 million tonnes from the September forecast of 176.71tonnes, and in future reports might have to lower production and ending stocks again.
Stocks at the end of 2011-12 were 198.17 million tonnes.
Exports from the Black Sea region are expected to fall off in November as the exportable surplus runs out. The prospects from Australia and Argentina are dimming a little as buyers look for alternative sources of supply, meaning North American wheat producers should see good demand for their grain.
But again, optimism must be tempered with evidence of a slowing global economy that will weigh on all commodity markets.
