USDA released its final crop production estimates for 1996 on Friday, January 10. They also released estimates of grain stocks, export projections, and production estimates for other parts of the world. The reports contained several surprises and resulted in significant price movement in most grain futures.
Corn
USDA's final estimate of U.S. corn production for 1996 is 9.293 billion bushels. This is slightly below the average trade estimate prior to the report but about 28 million bushels larger than the November estimate. This represents an increase of about 26 percent from 1995 production. More than 73 million corn acres were harvested for grain in the U.S. in 1996, compared to less then 65 million in 1995. Total harvested corn acres in the U.S. for 1996 are actually larger than in the record production year of 1994. National corn yields averaged 127.1 bushels per acre. This compares to 113.5 and 138.6 in 1995 and 1994, respectively.
Wisconsin corn production is estimated to be 333 million bushels. This is almost 15 million bushels less than last year, and more than 20 percent below 1994 production. Corn yields in Wisconsin are estimated to be 111 bushels per acre. Wisconsin yields in 1995 were 114 bushels per acre, and in 1994 141 bushels per acre.
The biggest surprises for the corn market are the stocks estimate and the revisions in domestic consumption and carryover expectations. Corn stocks as of December 1, 1996 were estimated to be about 6.9 billion bushels. This implies first quarter U.S. feed use in the 1996/97 marketing year was over 20 percent above 1995/96 feed use in the first quarter. As a result, USDA raised domestic feed use for the entire marketing year by 225 million bushels, and lowered expected carryout to 959 million bushels. While this is a significant reduction in expected carryout, it still represents more than twice the carryout from the 1995/96 marketing year. Based on current demand projections, the expected carryout represents over 5 weeks of supply. Using the revised consumption and carryout numbers, USDA increased its average farm price for corn in 1996/97 to $2.55 to $2.85 per bushel. This is still well below last year's estimated average farm price for corn of $3.24.
The relatively smaller and in some cases lower quality corn crop in Wisconsin relative to the rest of the country has resulted in stronger than normal basis levels for corn for this time of year in many parts of the state. In addition, futures contracts for deferred delivery (i.e. May and July) are only trading at 1 to 2 cent premiums to March delivery corn, and are still below prices at which the December 1996 Futures contract expired. These factors together make corn storage in most parts of Wisconsin a risky strategy. Any physical storage is simply a bet that the July futures contract will rally. While this could happen, it is unlikely that there will be any real market movement to the upside until planting season. Any price rallies at that point will depend on poor planting conditions. Until then the corn market will focus on exports (which to date have been sluggish) and domestic demand. The January 10 reports estimated 1996/97 exports to be down 15 percent from last year. Further, China has been noticeably absent as a corn buyer thus far. It should also be noted that domestic corn sales are running well over 30 percent behind last year. This suggests that there is farmer owned corn to be marketed on any rallies which may occur.
The situation described above is one which suggests that purchasing call options in the futures market may be a better strategy then physical storage of corn. July futures closed today at $2.695 per bushel. A call option with a $2.70 strike price for July was 13 cents per bushel. This is less than the physical storage costs through July, and assures you cannot lose more than 13 cents per bushel if prices actually fall. If futures rally, the option will reward you in the same way physical storage would. Since basis levels are relatively strong, it will take a futures rally to profit from storage this year.
Soybeans
USDA forecast 1996 soybean production to be 2.382 billion bushels. This represents a reduction of 20 million bushels from the November estimate. However, this is still the second largest U.S. soybean crop ever. While production is near record levels, consumption is expected to set a new record. Total consumption of soybeans for 1996/97 is forecast to be 2.145 billion bushels. The market reacted to these projections by moving limit up on Friday (30 cents per bushel), and another 7 to 8 cents a bushel today.
After increasing domestic crush and reducing feed use, USDA ended up with a 25 million bushel reduction in ending stocks. Ending stocks for 1996/97 are now forecast to be 155 million bushels, or less than a 3.5 week supply at current demand projections. This is the tightest stocks to use ratio since the early 1970's. It results in a soybean market environment much like the corn market of last year. There is very little room for any production problems in soybeans for the coming year, and any increases in demand will result in an even smaller cushion. USDA projected average farm prices for soybeans for 1996/97 to be between $6.60 and $7.10 per bushel, 20 cents higher than earlier estimates. This compares to an average price of $6.77 per bushel last year.
Current expectations for South American soybeans are relatively high. Argentina and Brazil are expected to produce 39 million metric tons of soybeans in 1997, compared to about 36 million metric tons last year. The soybean futures market will be very sensitive to changes in South American production expectations in the next few months. If production prospects in the Southern Hemisphere deteriorate, new crop soybean futures prices will increase their premium over corn to "buy" additional acres in the U.S.
Despite a 70,000 acre increase in soybean plantings, Wisconsin production only totaled 32.2 million bushels. This is well below 1994, and 2.2 million bushels below last year. Wisconsin yields in 1996 averaged 37 bushels. Yields in 1994 were 43.5 bushels per acre, and in 1995 43 bushels per acre.
While local soybean basis levels in Wisconsin are strong for this time of year, the tight supply situation makes soybean storage relatively less risky than corn. As evident from Friday's action, any news which increases demand or reduces South American production prospects will have a significant impact on prices. The next few months are likely to be quite volatile in terms of price activity. In addition, unlike corn, China is an active buyer in both the soybean and the soybean meal markets. USDA raised their expectations of soybean product imports for both China and the Philippines on Friday.
Wheat
The wheat market was surprised by a reduction by USDA in estimated winter wheat seedings for 1996/97. Planted acres were estimated to be 48.2 million, a reduction of 3.76 million over last year. However, harvested acreage is still expected to increase over 1996 due to abnormally high acreage abandonment last year. July 1997 futures prices for wheat are currently in the $3.60 per bushel range. Given the production risk faced by most Wisconsin producers who grow wheat, it is likely too early to get very aggressive on pricing 1997 production. While price volatility is likely to increase in coming months, it is also possible wheat prices could improve as the market begins to anticipate any potential damage to the 1997 crop.
Conclusions
Storing old crop corn appears to be relatively risky. An options strategy is probably the best way to take account of any positive price action in the corn market this spring. While current basis levels also do not encourage soybean storage, the market dynamics are such that very little would need to change for the soybean market to move to higher prices. As a result, storing soybeans is probably not as risky as storing corn. Any pricing of new crop (corn, beans, or wheat) is likely premature. While I do not see a significant price rally in corn in the near future, I also believe downside risk is limited so producers can take a wait and see attitude. I do think both wheat and soybeans could see some additional positive price action and therefore think there is a good chance to lock in better new crop prices for those commodities.
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