Milling & Baking News - August 23, 2011 - 30

Grain Market Roundtable 

their premium to the other wheat contracts in response to the diminished spring wheat production outlook. Millers and bakers in response have increased substitution of high-protein hard winter wheat, supplies of which were plentiful from the 2011 harvest, for spring wheat of equivalent protein in manufacturing certain flour blends. “Of the three major crops, the wheat fundamentals are still the most bearish, but corn and soybean fundamentals being bullish prevents wheat prices from going down as they otherwise might,” Mr. Meyers said. “I think the corn production forecast will go lower, which will have a direct impact on wheat prices,” Mr. Meyers said. He pointed out Chicago wheat futures traded at a discount to Chicago corn futures for awhile and even now were only at a narrow premium to corn. A narrow wheat/corn price spread and certainly wheat trading at a discount to corn may result in even higher wheat feeding than the U.S.D.A.’s current forecast, Mr. Meyers said.

U.S. carryover
million bus 976 861

2003 2005 2007 2009 2011
Source: U.S. Department of Agriculture *forecast

What was true for the United States was true for the world. The U.S.D.A. forecast world feed use of wheat in 2011-12 at 675 million tonnes, up 5 million tonnes from its July forecast, while it reduced its forecast for world feed use of corn by 7 million tonnes, to 510.09 million tonnes. “Relatively cheap wheat worldwide means you’re feeding more wheat in many countries at the expense of corn

and other feed grains,” Mr. Meyers said. Asked what factors might turn wheat prices sharply higher in the next several weeks, Mr. Freed and Mr. Meyers agreed higher corn prices would be the most likely culprit. The most critical factors pertaining specifically to wheat to watch would be the ultimate size and quality of the spring wheat crop and any expansion in the drought across the southern Plains as farmers prepare to plant the 2012 hard winter wheat crop. Mr. Freed and Mr. Meyers also said markets must keep an eye on weather across the Southern Hemisphere. Wheat planting was nearly completed in Argentina and was under way in Australia. The U.S.D.A. lowered its forecast for the Argentine crop by 1.5 million tonnes, to 13.5 million tonnes, but held its forecast for Australian wheat production in 2011-12 at 25 million tonnes, which compared with a record 26 million tonnes harvested in 2010-11. A weather-related downgrade to the Australian wheat crop would

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he expects later U.S.D.A. crop reports to show lower yields and reduced harvested area from the August report. “When corn is stressed, it’s unusual for yields to go up,” Mr. Meyers said. “Rainfall has been spotty and we’re still losing yields.” The worst of the hot, dry weather came in July during the prime pollination stage for corn in many areas. He expected the September report to reflect lower yields and the October report to trim acres off the August numbers. The U.S. corn carryover on Sept. 1, 2012, was projected by the U.S.D.A. at 714 million bus, down 156 million bus, or 18%, from 870 million bus in July and down 226 million bus, or 24%, from an upwardly revised 940 million bus in 2011. The U.S.D.A. 2012 corn carryover number was below average trade expectations near 745 million bus. “Ending stocks might not be as tight as 714 million bus,” Mr. Meyers said. He suggested there may be a “couple hundred million bus” of corn added to the 201112 supply if the ethanol subsidy is allowed to expire on Dec. 31, 2011. Total corn supply for 2011-12 was projected at 13,874 million bus, down 496 million bus, or 3%, from July and down 311 million bus, or 2%, from 14,185 million bus in 2010-11. Projected feed and residual use in 2011-12 was projected at 4,900 million bus, down 150 million bus, or 3%, from 5,050 million bus in July and down 2% from 5,000 million bus in 2010-11. “Feed and residual use is projected 150 million bus lower (than in July) reflecting the smaller crop and higher expected prices,” the U.S.D.A. said. Food, seed and industrial use was projected at 6,510 million bus, down 40 million bus from July (including corn for ethanol at 5,100 million bus, down 50 million bus, and food and seed use at 1,410 million bus, up 10 million bus from July), but up 90 million bus from 6,420 million bus in 2010-11.
30 / August 23, 2011 Milling & Baking News

U.S. corn exports in 2011-12 were projected at 1,750 million bus, down 150 million bus, or 8%, from 1,900 million bus in July and down 75 million bus, or 4%, from 1,825 million bus the previous year. Mr. Meyers was somewhat surprised by the market’s reaction to the lower-than-expected U.S.D.A. corn numbers. He had anticipated a 50c to 60c rally in corn futures, not the 25c-a-bu-or-so gains that have occurred, although corn futures briefly traded up the 30c-a-bu daily limit on the day of the report. “The market reaction implies the U.S.D.A. is saying prices have to go higher to ration usage,” Mr. Meyers said. The market seemed to focus more on the U.S.D.A.’s lower corn usage numbers than on supply, he noted. The average farm price of corn was projected to range at a record high $6.20@7.20 a bu, up 70c from July and compared with $5.20@5.30 in 2010-11. The projected high range in July 2008 was $5.50@6.50, which later was trimmed with the final 2008-09 average being $4.06 a bu. Nearby corn futures prices have traded above $7 a bu since the Aug. 11 U.S.D.A. reports, down about 10% from the June high but up about $3 a bu, or more than 70%, from a year ago. Mr. Meyers expects corn prices will hold strong, with nearby futures averaging between $7.25@7.65 a bu for the fourth quarter. Next summer he expects corn futures to average closer to $6 a bu as more acres are planted and yields move closer to trend. But first, buyers will have to get through the next 10 months of tight supplies, he said. “If you don’t have fourth-quarter needs covered, start buying at $7,” Mr. Meyers said, “and when corn is below $7.25 a bu, book some corn for next year.” Meanwhile, production and supplies of other feed grains also are lower, with 2011 oats and barley crops forecast to be the smallest on record and the sorghum crop the smallest since 1956. Oats production was

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Milling & Baking News - August 23, 2011

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