Warning: Grain Tsunami Incoming
Prepare for soaring production, volatility
Grain merchandising is a never-ending series of challenges, and 2012 crop has been that in spades. Drought-decimated corn and soybean crops left elevators with less grain to handle and less revenue. Buyers and sellers alike have had to adapt to record high basis levels on corn and soybeans, tight holding by farmers, and volatile futures spreads. At least wheat offered some reasonable revenue opportunities!
Even bigger challenges lie ahead. September 1 combined stocks of corn, soybeans, and wheat this year are projected to be around 1.45B bushels, the lowest since 1997, and compared to 1.9B bushels in 2012. (This uses USDA’s 9/1 forecast carryout on corn and soybeans. Wheat stocks are estimated from USDA June 1 wheat carryover plus estimated production minus estimated June/July/Aug disappearance.)
By late August 2013, the wind will be whistling through bins across the country. Around 88% of U.S. storage space will be empty, the pipeline of corn and soybeans will be nearly depleted, and imports from South America may be the story. Summer basis swings on corn and soybeans could be dramatic and violent, with atypical grain flows to redistribute supplies. The BNSF railroad, for example, has reduced rates for soft red wheat from the eastern Corn Belt to Texas feedlot areas and to the Pacific Northwest export terminals. But the lack of corn and soybeans can become bearish on the basis in some areas; there’s no reason to bid up if you can’t originate enough inventory to run your ethanol or soybean crush plant.
Some export facilities may sit nearly idle by late summer (except for wheat); U.S. soybean export shipments were already at a record 85% of the crop year projection by March 1 and total sales were at 95+% — with 6 months until harvest. Tight corn and soybean stocks mean exports can’t climb much in any case, until 2013 crop hits the bins.
But a dramatic turnaround lies ahead and sharp grain traders will use idle time wisely this summer. In February, the USDA Economic Outlook forum in Washington, D.C., offered optimistic scenarios of soaring production and sharply higher ending stocks in 2014 on corn and soybeans, along with slightly lower wheat production and stocks.
- Corn: 96.5M planted acres @ 163.6 bpa for a crop of 14.53 billion bushels. Ending stocks in 2014 at nearly 2.2 billion bushels
- Soybeans: 77.5M planted acres @ 44.5 bpa for a crop of 3.405 billion bushels. Ending stocks projected at 250M bushels
- Wheat: 56M acres @ 45.2 bpa for a crop of 2.1 billion bushels; 2014 ending stocks at 639M bushels, the lowest since 2007/08.
- Corn + soybean production: 17.94B
At this point there’s no reason to doubt USDA’s general premise, although a repeat of last season’s heat and drought could change things quickly and dramatically. Here is an alternate Grain Service Corporation (GSC) scenario for '13 production:
- Corn: 98M acres @ 155 yield = 13.9B bu. (record)
- Sbns: 77M acres @ 43 bpa = 3.3B bu. (near-record)
- Wheat: 56M acres, and 2.2B bu. production
USDA assumed corn acres down .7%, and soybean acres up .3%, largely based on the soybean/corn price ratio. But feedback from GSC clients and many other surveys point to higher corn acres this year; we used 98M for this scenario. Our yields assume a significant recovery from the drought, but are below USDA’s figures and below prior records. Our wheat scenario uses USDA’s acreage but a slightly higher total crop.
Even using GSC’s somewhat more conservative production scenario, inventories this fall could reach 20 billion bushels, despite the depleted Sept 1 stocks, as potential record corn and soybean crops pour into elevators. This would be nearly 3B bushels higher than last year and close to the record 20.5 billion bushels set in the fall of ’09. USDA’s Outlook Forum projections on corn and soybean production are 740M bushels higher than used in Chart 1 and Table 1, which would only add to the challenges. (Note: All production and stocks figures exclude sorghum, oats, barley, and other crops.)
TABLE 1 & CHART 1 HERE
Navigating the 180° transition from '12 crop to '13 crop will be difficult, but reality will be more complex than simple numbers. The Sept 1 totals in Chart 1 and Table 1 assume corn and soybean harvest is complete, when it’s really barely underway. And daily consumption also serves to free up space. Total bin space is higher now than in 2009; USDA statistics indicate around ¾ of a billion bushels of space have been built in 2010 through the end of 2012, plus more this year. Regional variations also become a factor, in carry-over stocks as well as production. Southern and Eastern states will hold a larger percentage than usual of carryover stocks this year, and these areas are no longer in drought, improving their production prospects. The Western Corn Belt remains the greatest concern, with the double whammy of minimal carryover stocks and ongoing severe drought.
Overall, the reversal to a tsunami of grain carries implications of cheap basis and wide carries across corn, soybeans, and wheat. But those empty bins in early September and the depleted pipeline will take time to replenish, and steep basis premiums are likely for the early bushels — premiums that can often roll forward. Plan for cheap basis this fall, but be careful about shorting basis for early slots.
As ’12 crop basis trading opportunities dwindle along with grain stocks, use that ‘spare time’ to prepare for the fall harvest.
- Review credit lines and financing needs with your lender.
- Project potential grain receipts against available space.
- Consider booking fall freight early to ensure cars and fix your cost.
- Monitor new-crop futures carries
Financing may become a bigger issue again. Overall, crop values may not be much higher than last year — if at all — but merchandisers will likely be carrying more owned-inventory and for longer periods this harvest. Table 2 uses production X USDA’s average farm price as a broad measure for the value of the crops. This won’t determine individual financing needs, but it’s a starting point for discussions with lenders.
TABLE 2 HERE
A problem that’s anticipated is often a problem that’s averted, and by summer much of the furor in old-crop basis may have subsided. Imported corn and new-crop U.S. wheat will serve to stretch feed supplies in some regions, and soybean and perhaps some meal imports will also buffer the transition. Even with unusual stop-gap measures, the merchandising and logistics transition will still be dramatic as the 2013 harvest rolls into town and last year’s shortfalls turn into a tsunami of grain.