More supply factors for grains trade to digest

Welcome to the USDA's hectare Houdini act

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Grains industry stakeholders are grappling with the many global production and supply balls that are up in the air right now, including new USDA estimates of stocks and intended spring planting areas.

Grains industry stakeholders are grappling with the many global production and supply balls that are up in the air right now, including new USDA estimates of stocks and intended spring planting areas.

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USDA adds to the many global grain production and supply balls up in the air right now.

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The United States Department of Agriculture (USDA) stunned global grain markets yet again last week with the release of its quarterly US Grain Stocks report and the first draft of planting intentions for this year's US corn and soybean campaigns.

This late March data frequently challenges orthodox market judgement, and it certainly didn't disappoint. The ensuing frenzy sent futures prices sharply higher across the board.

In recent years, the grain stocks numbers have provided the major shock in this USDA report.

But last Wednesday, it was the corn and soybean seeding estimates that spooked the market.

Both were well below expectations and this elevated concerns about global supply issues for the next 12 months.

Heading into the report, corn prices were posting 7.5-year highs and soybean prices were perched close to 6.5-year highs.

So, an overwhelming majority of market analysts had expected a record combined planted area of more than 74 million hectares.

But the USDA had other ideas, posting 72.34 million hectares collectively.

This was made up of 36.89 million hectares of corn - the biggest area since 2016 - and 35.45 million hectares of soybeans - the biggest area since 2018.

The USDA's wheat planting intentions forecast bucked the trend, coming in above market expectations at 18.76 million hectares.

This compared to the average trade estimate of 18.2 million hectares and would be up significantly from 17.93 million hectares planted last year, which was primarily due to an increase in the area seeded to winter wheat in the fall.

Despite the "limit up" futures market reaction for both corn and soybeans, the USDA's take on farmer planting intentions in 2021 was greeted with a high degree of skepticism.

Due to current higher prices, much better seeding conditions than at this time last year, crop insurance payouts that guarantee profitability and strong global demand, there are plenty of incentives for the US farmer to maximise the area sown to row crops this spring.

The USDA will have a second crack at planting estimates when it posts the results of its early June farmer survey on the final day of the financial year.

Expectations are already high for intended corn and soybean sowing areas to come in much higher than last week's disappointing forecast, especially if spring planting conditions remain favourable.

But will that prospect be enough to relax domestic and global supply concerns for the next three months?

The market sentiment is predicated on trend yields, and - even if actual plantings for corn and soybeans are each up by 1 million hectares - the US balance sheet remains perilously tight.

Any sniff of new crop yield issues, particularly for corn, and US rationing will be extreme.

It is worth remembering the USDA is still light on its corn export numbers to China.

And historical precedent does not lend itself to significant upward revisions in the June report, especially of the magnitude required to meet the expectations analysts held for last week's US estimates.

In the past two years, there has been downward area revisions for corn of 2.51 million hectares and 1.21 million hectares from March to June.

And only once in the previous 10 years was the final number revised up by more than 1 million hectares.

The historical trend for soybeans is even more challenging.

There have been only four instances in the past 23 years when the June soybean area posted by the USDA was more than 1 million hectares higher than its March forecast.

But two of those years were on the back of a historically tight domestic balance sheet, just as in 2021.

That said, there have only been two years since 2009 where there was a downward revision - both due to poor seeding conditions.

In contrast to the spring planting intentions forecast, the USDA's quarterly grain stocks numbers came in refreshingly close to trade estimates - not that this provides any market relief.

Total soybean stocks held on-farm and off-farm on March 1 were estimated at a five-year low of 42.57 million tonnes.

This was down more than 30 per cent, or 18.66 million tonnes, from the far more comfortable figure of 61.23 million tonnes at the same time last year.

The USDA pegged national March 1 corn stocks at a very bullish 195.62 million tonnes.

This is a 3 per cent decline from almost 202 million tonnes in 2020, and was slightly lower than the average trade estimate of 197.29 million tonnes.

Corn feeding in the US late last year and early in 2021 has been occurring at its highest level for three years.

If this continues, some analysts are concerned the final carry out could fall below 25 million tonnes - which is the "magical" one billion bushel barrier.

It seems that the tight soybean stocks and favourable demand story have not been enough to persuade US farmers to swing more corn area into soybeans this season.

Growers are citing the importance of crop rotations to maintain long-term soil health and the strong domestic and export demand outlook for corn to support their argument.

And, at current prices, consumers across the globe are turning to food grains to plug their feed grain void.

Corn cargoes are being replaced with wheat as the prices move closer to parity.

The corn/wheat spread is approaching its eight-year low of US$0.44, which is encouraging wheat consumption at the expense of corn.

The big advantage of wheat is that the higher protein content allows feed grain rations to include less soybean meal to achieve the same nutritional outcome.

In China, the government has already auctioned more than 42 million tonnes of wheat since June 22 last year for use in its domestic feed market.

More recently, Beijing sold 9 million tonnes of rice from state reserves, via the government auction system, specifically earmarked for feed channels to help combat high domestic corn prices.

There are many global production balls in the air right now, and the USDA added two more with its first cut on US spring planting intentions.

There is very little wriggle room in the US row crop balance sheets.

There are supply alternatives for global consumers, but production hiccups in any region have the potential to be quite explosive for international markets.

And Northern Hemisphere winter crop output could still upset the apple cart.

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