(Laura McKenzie/Texas A&M AgriLife Marketing and Communications)
Last week’s WASDE report projected tightened ending stocks primarily due to weather conditions and Russia’s invasion of Ukraine. The chances of increasing ending stocks to previous levels during this season are very low. Today will review the WASDE report and discuss those factors that have created this bullish market reaction.
Dates & Deadlines
5/26/2022 – North Texas Regional AG Summit, Henrietta (2715 US-287 N, Henrietta, TX)
6/17/2022 – Direct to Consumer Beef Sales Workshop, Amarillo (Call 806 677 5644 and ask for Lacrecia Garza to register)
6/27/2022 – Texoma Youth Cattle Shortcourse, Clay County.
What We’re Reading
USDA accepts CRP contracts on 2 million acres – FarmProgress
Fertilizer chaos to last into 2023 – Bloomberg
Ag groups want more time to evaluate SEC rule – FarmProgress
Real-world cattle risk management – FarmProgress
WASDE Review
Last week, May 12, USDA released the latest World Agricultural Supply and Demand Estimates, including US acreage and yields estimates. The effects of drought and the Russian invasion of Ukraine had a significant role in their projections. WASDE projected tight ending stocks had a bullish market reaction.
Wheat
Even considering Russia’s invasion of Ukraine and the drought in the United States, USDA estimated the world’s wheat production is just 0.6% less than last year. Higher wheat production projections for Canada, Russia, the United States, and other wheat-producing countries (Graph 1) offset the significant reduction in Ukraine’s production (35%).
Graph 1: Wheat Majors Producers (WASDE 2022-23 Projections)
Still, December wheat future contracts rose significantly in the Kansas market (Graph 2) after the USDA report. What were the market conditions that precipitated this bullish reaction?
Graph 2: KC HRW July 2022 Contract. CBOT
Worldwide, wheat stocks continue to fall. Even with a lower estimated total consumption (-0.4%), total use is still higher than total production from 2020-21. World wheat carryover percentage is still higher than in 2008-09. However, the World Wheat Less China percentage of carryover is well below the minimum we have seen since 2008 (Graph 3). China is one of the largest wheat producers and importers.
Graph 3. Word Wheat Carryover Estimates.
Another critical fact to consider is the USDA wheat projections for the United States. The WASDE report estimates a slight increase in the wheat area planted and a small decrease in the harvested area. In turn, it calculates a yield above last year. Keep in mind that part of this yield considers spring wheat. WASDE estimates a higher wheat production than last season and lower final and carryover stocks for the US. The risk of lower yields would potentially result in ending stocks much lower than in recent years (Table 1).
Table 1. U.S. Wheat Supply and Demand
Corn
WASDE projects a lower world production of corn (-2.8%). USDA reduced Ukraine’s estimated output by more than 50%. Production in the United States also decreased by 4.3%. This lower production in the US is significant considering the vital role that the United States plays in corn world production and as an exporter (Graph 4). The higher production estimated for the southern hemisphere, in Argentina and Brazil, is not high enough to compensate for the effect of Ukraine and the United States.
Graph 4. WASDE Corn 2022-23 Projections.
Estimated world corn consumption was also estimated lower than last season. Thus 2022-23 ending stocks resulting in higher corn futures prices after the USDA report.
WASDE estimated a smaller US corn area and a yield like last season, although below the trend. It projected lower consumption of corn for animal use and lower exports. It does not forecast an increase in the use of corn for ethanol since they are expecting similar use of fuel from last year. 2022-23 ending stocks and carryover percentages are lower than last year but higher than the 2020-21 campaign (Table 2).
Table 2: WASDE US Corn Supply and Demand 2022-23 Projections
Sorghum
WASDE projections estimate lower sorghum acreage and production in the United States (Table 3). Worldwide, higher production in Sudan and Nigeria offset US lower production effect. The projected world production of sorghum (62.67 million tons) is almost like last season’s (62.32 million tons).
Table 3. WASDE US Sorghum Supply and Demand 2022-23 Projections
Estimated US sorghum exports are still lower than last year. China remains the largest importer (86% of imports) and the most important destination of US sorghum. The US will continue being the world’s leading sorghum exporter (66%). Sorghum stocks are estimated to be 27% less than last season but still higher than the 2020-21 season.
Cotton
USDA projections increased the estimated planted acreage in the United States from last season by one million acres. On the other hand, the projected harvested area is 15% lower. WASDE projects a 25% abandonment rate of the planted area considering the forecasted drought for this summer, especially in West Texas. This high abandonment rate is still better than the 2020-21 campaign rate (Table 4). US ending stocks are projected to be lower than last year. Any further decrease in the harvested area or yield production will result in a low ending stock level that we haven’t seen in many years.
Table 4. WASDE Cotton Supply and Demand
Globally, the USDA projects a higher production of cotton and a lower consumption due to the low competitiveness of cotton with polyester with these high prices. Like wheat, consumption continues to be greater than production. A small cut in the world’s ending stocks of almost 1% is expected. Prices for December cotton contracts reacted higher after the USDA report, primarily due to the projected low ending stocks in the United States (Graph 5).
Graph 5. December 2022 Cotton No. 2 Futures. ICE Futures U.S.
Takeaways
Tightening ending stocks are expected due to weather effects and Russia’s invasion of Ukraine. The chances of increasing ending stocks to previous levels are very low. We are in a volatile market, and many things need to happen before defining the 2022-23 grains and cotton production. The drought, the Niña forecast until December, the geopolitical instability in Europe, southern hemisphere production, and high production costs will continue to generate great uncertainty in the market.