The second quarter of 2013 should be a make or break timeframe for grain markets.
Fundamentally, a case can be made for either sharply higher or lower prices, depending on spring weather conditions and the early start to the growing season.
With corn and soybeans, ending stocks are historically among the tightest in history with corn stocks forecast for 2012/13 at 632 million bushels and soybean stocks at 125 mb.
The corn stocks to usage ratio is 5.6 percent, while soybean usage is 6 percent. These numbers will only allow for limited downside risk for the rest of this marketing year and should push the nearby contracts higher during the early part of the growing season.
Bull spreads, where traders buy the nearby old crop contracts and sell the new crop contracts, should prove to be popular during the second quarter.
However, corn demand is a concern with recently lowered exports now at 825mb, the lowest yearly exports in more than 40 years.
The USDA explains the stronger export competition from South America is to blame for lower U.S. exports as the high U.S. prices of last summer has shifted buyers away from the U.S. Annual exports stand at 582 mb compared to 1.265 billion bushels at this time last year.
For soybeans, U.S. soybean crush is well ahead of last year’s pace and the USDA has the final crush well below last year, indicating critical rationing needs must occur.
Exports for soybeans are on fire with 1.304 bb sold this year compared to 1.12 bb last year.
Wheat sales are slightly behind last year at 890 mb this year, compared to 906 mb last year.
The most critical component of pricing this quarter will be production. There will likely be an increase of corn acres this year. Using a trendline forecast of 159 bushels per acre, US. Corn production could swell to 14.2 bb, which would be a new record and 3.5 bb more than last year. If this production forecast is realized, ending stocks could easily swell to 1.8 bb.
For soybeans, it is likely 78 million acres will be seeded this spring and, using trendline yields of 43 bpa, production will be near 3.3 bb and 10 percnet larger than a year ago. Ending stocks are expected to rise, but so will demand, resulting in an expected 250 mb carryout.
Given these projections, it is clear that with a normal start to the growing season, prices will be on the defensive. Only adverse weather will push prices higher as balance sheets will tighten up once again if production is threatened.
Corn closed the week $.13 1/2 higher. Last week, private exporters did not report any private sales.
In the weekly export sales report, corn sales shows 25.7mb slated for 2012/13. This is above the 9.8 mb that is needed to stay on pace with the USDA forecasts of 825 mb.
Corn found technical support and rallied into overhead resistance. For now, resistance should hold as demand is extremely weak. It will take a long time to rebuild this export demand and unless another major producing country has a production problem, lower prices will be needed to improve demand for U.S. corn products.
The market should turn its attention to the quarterly stocks and acreage report at the end of the month and prices should turn lower. This report should be bearish for 2013 planted acreage, but the last quarterly stocks report was bullish.
Strategy and outlook: Producers are now 80 percent of 2012/13 crop and are also 40 percent sold of the 2013/14 crop. They r-owned 50 percent of the 2012/13 corn crop with July calls. Exit if July trades at $7.05.
Soybeans closed the week $.45 lower from last week. Last week, private exporters announced 165,000 metric tons of U.S. soybeans have been sold to China for the 2013/14 marketing year.
In the weekly export sales report, soybean sales were 28.8 mb. This is well above the 2.3 mb that is needed to stay on pace with the current USDA forecast of 1.345 bb.
NOPA released its February crush numbers, which were disappointing at 136.35 mb, compared to the January numbers of 158.2 mb and analyst expectations of around 142 mb.
Soybeans remain range bound with beans locked into a trading range of $14.95 on the upside and $14.05 on the downside. With the strong demand trends and the spring growing season approaching, a move above $14.95 seems likely with $15.70 the next major resistance for the soybean market.
South American hedge pressure is picking up as harvest in Argentina and Brazil gains momentum.
Strategy and outlook: Producers are 80 percent sold of the 2012/13 production and are 40 percent sold of 2013/14. Re-own 50 percent of 2012/13 production with July soybean calls if July futures hit $13.75.
Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien. He can be contacted at 605-660-1155.