July 17, 2012

In its latest WASDE Report released on July 11, 2012, the USDA's downgrading of world stocks of wheat, corn and soy estimates gives a bullish background for producer prices, according to Offre & Demande Agricole UK Ltd. Leo von Kameke.

Leo von Kameke, a market analyst for Europe's leading provider of independent grain market intelligence services to the farming and agri -food industry, states:

"In June, the USDA estimated world stocks of wheat, corn and soy at 185.8 million tonnes, 155.7 million tonnes and 58.5 million tonnes, respectively. Its latest report downgrades these to 182.44 million tonnes, 134.09 million tonnes and 55.66 million tonnes, which are below the market's expectations of 182.5 million tonnes, 145.0 million tonnes and 57.0 million tonnes. Markets reacted as expected when the data was released, with prices rising across the board. ODA's analysis indicates in our last monthly report that world wheat stocks are 182.2 million tonnes, in line with the USDA's latest estimate, but our research puts world corn stocks at 152.7 million tonnes and soy at 56.9 million tonnes.

"The USDA's estimate of world wheat stocks came as no surprise. Global production decreased by 6.7 million tonnes, mainly as result of production shortfalls of four  million tonnes shortfall in Russia and two million tonnes in both Kazakhstan and China. In part this will be offset by the slight rise of 2.1 million tonnes in EU-27 production, but the net impact is that global ending stocks of wheat are estimated to fall by 3.3 million tonnes to 182.4 million tonnes, very much in line with the market's expectation of 182.5 million tonnes.

"The stand-out figure in the USDA latest Report is the substantial reduction in its estimates of the average US corn yield. In June 2012 the USDA estimated it at 166 bushels per acre, but a sharp deterioration in growing conditions since then has seen that figure revised sharply downward to 146 bushels per acre, much lower than the market's expectation of 154 bushels per acre. This has led to the estimate for US production being reduced by 46.2 million tonnes, with US ending stocks down 17.7 million tonnes to 30.1 million tonnes, compared with market expectation of 32.5 million tonnes.

"At 22.9 million tonnes, global corn consumption is also lower, mostly due to an expected fall in US meat production during the third-quarter due to a lack of feed supplies. This should result in global ending stocks being down 21.7 million tonnes at 134.1 million tonnes, compared with the market's expectation of 145 million tonnes. This is a much greater decline than was expected and should prove very bullish for producer prices, as will the decline in the US 'stock-to -use' ratio, which is now just 10.6% compared with a global figure of 14.9%.

"The USDA's downgraded estimate for US soy yields, from an average of 43.9 bushels/acre in its June 2012 Report to just 40.5 bushels/acre in July, is much lower than the market's expectation of 42.3 bushels/acre, resulting in a 3.9 million tonnes reduction in global production to 267.2 million tonnes. Very low stocks of soy in the US, just 3.54 million tonnes, give a supply-to-use ratio of just 7.5%, compared to an already low world supply-to-use ratio of 21.1%.

"This places significant additional pressure on the already tight feed complex between corn, wheat and barley, which now stands lose a further 20 million tonnes. This resulted in significant increases in prices following the release of the USDA Report and highlights how fundamental Supply and Demand expectations are driving the markets."