21 May 2010

5 minute read

North America

May World Agricultural Supply and Demand Estimates Report

Last week, USDA World Agricultural Outlook Board released the May World Agricultural Supply and Demand Estimates (WASDE) report. The May WASDE report is always of particular interest to the market because it includes USDA’s first estimates for the 2010/11 crop year and for 2011 meat supply and use.

In last week’s report, USDA revised their estimate of corn carryover for the current marketing year down to 1.738 billion bushels, well to the low side of pre-report expectations. The lower carryout reflects a slight downward revision in production as well as modest increases in corn use for ethanol production and exports. For 2010/11, USDA currently projects production of 13.370 billion bushels against total use of 13.300 billion bushels, resulting in a 2010/11 carryover of 1.818 billion bushels. This was a little below the average pre-report estimate of carryover but was well within the range of expectations.

While last week’s WASDE report was at least modestly bullish for corn, it is worth considering just how much more bearish the grain market outlook has become over the past couple of months. In February at the annual USDA Outlook Conference, 2009/10 corn carryover was projected at 1.719 billion bushels (a figure from the February WASDE report), and 2010/11 carryover was projected to decline to 1.654 billion bushels. The primary reason for the more recent projections of increasing carryover is the auspicious beginning to the 2010 crop. The Crop Progress report for the 18th week of the year (released the day before the WASDE) showed the corn crop at 81% planted nationally. This is the fastest pace of planting on record. Timely planting increases the yield potential of the corn crop, and USDA yield estimates reflect this. The most recent Crop Progress report, released today, was the first to provide condition ratings. As expected due to the favorable weather thus far, 67% of the corn crop was rated good and excellent. The February outlook conference corn yield estimate (a linear trend estimate) was 160.9 bushels per acre. Last week’s WASDE estimate (a liner trend adjusted to reflect the pace of planting for this year’s crop) was 163.5 bushels per acre. Unfortunately, yield potential is not the same thing is actual yield, and this year’s crop is obviously a long way from being in the bin. In light of this fact, USDA’s estimate of 13.3 billion bushels of corn use is rather sobering. As has been the case for several years now, the market will be in no position to tolerate a short crop situation. Thus the potential for volatile corn prices is still with us, though the situation has improved notably since this winter.

Last week’s WASDE also included updates of USDA’s 2010 meat supply and use forecasts along with initial 2011 estimates. For 2010, changes to production estimates from last month’s report were small: slight reductions for both beef and pork, a slight increase for poultry. Overall, USDA is still projecting about a 0.3% decline in meat production in 2010 compared to 2009. For 2011, USDA projects a further 2% decline in beef production, citing the historically small cattle herd and calf crop as well as reduced cattle imports in 2011. Both pork and poultry production are expected to rebound in 2011, reflecting the shorter production lags in those industries compared to the beef industry. Relative to 2010, USDA projects a 2% increase in pork production and a 3% increase in poultry production for 2011. All together, these figures translate into a bit over a 1% increase in 2011 total red meat and poultry production.

The Markets

Once again this week, trade developed early, at least in places. Cattle traded hands in Kansas on Monday at mostly $100, about steady with the bulk of last week’s sales (though $1 to $2 higher than last week’s Kansas trade). A strong wholesale meat market continues to underpin cattle prices. The Choice cutout held over the $171 mark for much of the week, before taking a little more than $1 off on Thursday and Friday. The Select cutout has slipped a bit, widening the Choice/Select spread to over $4 – still historically narrow but about on par with last year at this time.

Feeder cattle prices were mostly steady to higher last week. Most calf markets were down two weeks ago as economic uncertainty fueled a selloff in major financial markets. A surge in equities markets at the start of this week helped commodity prices across the board, feeder cattle included, but by the week’s end losses in the equity markets more than erased those gains.