by Darin Newsom, DTN Senior Analyst
OMAHA (DTN) -- The most notable thing about the usually docile June supply and demand report is that it is in essence a dry run to see how markets act since they'll be open when the report is released. Officials will keep a close eye on the process with the June 29 Quarterly Stocks and Acreage Update on the horizon.
2011-2012 U.S. ENDING STOCKS
Corn: Domestic corn ending stocks are expected to decrease slightly from the May estimate of 851 million bushels to 828 mb. A slight supply adjustment could be seen with the balance of the difference coming in demand increases. Theoretically, if demand increases 15 mb, ending stocks-to-use would be trimmed to 6.5%. If the 828 mb is realized, it would imply a slight 0.5% increase in demand over average for the third quarter while holding fourth-quarter demand near average.
Soybeans: Strong demand for U.S. supplies is expected to trim domestic ending stocks to 197 mb from the May estimate of 210 mb. If this reduction comes from increased demand, ending stocks-to-use will fall to 6.4% from the 6.8% calculated in May. This ending stocks estimate seems high as it accounts for only a 0.5% increase above average demand for both the third and fourth quarters of 2011-2012, despite critically low stocks in South America.
Wheat: Domestic wheat ending stocks are expected to decrease by about 11 mb, most likely due to increased demand for feed wheat. If so, ending stocks-to-use would move from 34.7% in May to 34.0% in June, still a cumbersome bottom-line number. The 757 mb ending stocks estimate looks to be a reasonable estimate for 2011-2012 as it implies average fourth-quarter demand of about 15% of total supplies.
2012-2013 U.S. ENDING STOCKS:
Corn: Seriously, if the range of estimates is from 1.95 billion to 1.223 billion bushels, pre-report guessers really don't have much of an idea. And they can't be blamed given all the wildcards facing the 2012-2013 corn market. The average estimate of 1.74 bb is a reduction of 141 mb from the May estimate, accounting for the 23-mb decrease in beginning stocks (2011-2012 ending stocks), a possible increase in demand (ethanol?) and a possible decrease in 2012 production. The latter seems the least likely given USDA's penchant for holding firm on acreage and average yield in its June report. Changes tend to come later.
Soybeans: New-crop ending stocks are expected to increase slightly in the June report. It will be interesting to see how this happens if it occurs. Beginning stocks would be expected to fall 13 mb, meaning 2012 demand would be projected to slow and/or production increased. Given early reports, neither is expected to happen. This opens the door for a possible bullish surprise in new-crop soybeans, with USDA likely coming in closer to 130 mb than the pre-report estimate of 147 mb.
Wheat: With winter wheat production expected to decrease slightly, 2012-2013 ending stocks could be trimmed by 7 mb from the May estimate of 735 mb. This would imply a slight decrease in demand, offsetting the expected 11 mb dip in beginning stocks (2011-2012 ending stocks). Wheat seems poised for a possible bearish surprise with USDA coming in closer to 750 mb in its June report.
WORLD PRODUCTION AND ENDING STOCKS:
Corn: World corn ending stocks for 2011-2012 could be trimmed slightly from the 127.56 million metric ton reported in June, itself an increase of almost 5 mmt. WASDE may indicate it overestimated a bit, possibly erasing all the increase back to where the estimate was in April on lower global production estimates. If so, beginning stocks for 2012-2013 would be expected to fall, with ending stocks possibly dipping below 150 mmt.
Soybeans: Look for old-crop ending stocks to fall again, possibly testing the 50 mmt mark. Production reductions might be seen in South America, though there isn't a lot of room to trim given the May estimates of 42.5 mmt (Argentina) and 65 mmt (Brazil). Demand could also increase slightly given continued strong Chinese buying interest. A lower ending stocks number would also decrease beginning stocks for 2012-2013. If so, new-crop ending stocks could be whittled down below 55 mmt.
Wheat: The bottom line for 2011-2012 wheat is that global ending stocks and ending stocks-to-use are expected to remain burdensome, possibly increasing back to near 30%. Unless reductions are seen in key growing regions, look for new-crop ending stocks to remain near 188 mmt and ending stocks-to-use around 27.5%.
THE MARKET'S VIEW:
Corn: National average basis for corn (DTN National Corn Index minus nearby futures contract) remains much stronger than what has been seen over the last five years, implying a more bullish old-crop ending stocks scenario. Also, the new-crop forward curve (series of futures spreads) from December through July 2013 has seen a weakening carry, indicating a less bearish commercial outlook. Therefore, pre-report estimates would seem to be in line with what the market has been indicating for quite some time.
Soybeans: National average basis for soybeans remains strong, indicating continued solid demand for domestic supplies. This possibly implies a stronger third-quarter usage than what is reflected in the slightly lower old-crop ending stocks estimate. The new-crop forward curve continues to show a strong inverse, indicating the market is far more bullish than pre-report estimates are guessing USDA is coming in at.
Wheat: New-crop winter wheat spreads continue to show a strong carry, indicating a long-term bearish commercial outlook. Does this mean that ending stocks couldn't be trimmed as expected? No, but it does mean stocks aren't likely to fall to levels that get market bulls interested long term.
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Posted with DTN Permission by Haylie Shipp