Supply and demand estimates, global events impacting crop prices

July 12 WASDE report scrutinized. What are projections for rice, soybeans, cotton, corn and wheat?

Editor’s note: Download Rice, Soybeans, Cotton, Corn and Wheat: USDA - Supply and Demand Estimates, Slide Show, July 12, 2016 to view the charts referenced below.

Released July 12, the USDA World Agricultural Supply and Demand Estimates (WASDE) report brought the department’s balance sheets up-to-date for rice, soybeans, cotton, corn and wheat.

The markets for these crops, when observed in their respective price charts, appear torn between reflecting fundamentals and normal market participant activity and reflecting the price complexity created by fiscal and monetary intervention required to manage building global risks and uncertainty in a slow growth global economy with declining positive investment options.

As for building supply concerns, the WASDE report shows the productive capabilities of U.S. traditional program crop producers is alive and well. Presently, for some commodities this raises concerns that supply will overshadow demand.

What about farm policy versus risk management? Today’s transitional U.S. farm policy is designed to move U.S. traditional program crop agriculture into a decreasing dependency on the farm bill safety net and an increasing dependency on producing for the market and utilizing advanced risk management strategies. Several takeaways:

  • Elevated risk management in today’s slow growth global economy, where ongoing fiscal and monetary intervention is creating increasingly complex levels of price uncertainty is an absolute must.
  • Many producers are masters of productivity and business efficiency. That said, all should be aware that many of the world’s best money managers have and are misreading unfolding market price activity and demand for their products due to sustained slow global growth.
  • New farm legislation needs to consider potential future overproduction issues. 

As for Brexit and the social mood, with Theresa Mary May becoming Prime Minister of the United Kingdom on July 13, maybe the global markets will find some closure to the high level of market uncertainty generated by the United Kingdom voters deciding to leave the European Union. Prime Minister May is Leader of the Conservative Party since July 2016 and a Member of Parliament for Maidenhead since 1997. We will be talking about the dynamics and impact of social mood behind this event for a number of years into the future.

What does U.S. production show?

  • Long-grain rice – production 2015/16 and 2016/17, 133 and 183 million cwt respectively, 38 percent increase over 2015/16.
  • Soybeans – production 2015/16 and 2016/17, 3929 and 3880 million bushels respectively, 1.3 percent decline over 2015/16.
  • Cotton – production 2015/16 and 2016/17, 12.89 and 15.80 million bales respectively, 22percent increase over 2015/16.
  • Corn – production 2015/16 and 2016/17, 13601 and 14540 million bushels respectively, 6.9percent increase over 2015/16.
  • Wheat – production 2015/16 and 2016/17, 2052 and 2261 million bushels respectively, 10.2percent increase over 2015/16.

On to a summary of U.S. exports:

  • Long-grain rice – exports 2015/16 and 2016/17, 71 and 81 million cwt respectively, 14percent increase over 2015/16.
  • Soybeans – exports 2015/16 and 2016/17, 1795 and 1920 million bushels respectively, 7percent decline over 2015/16.
  • Cotton – exports 2015/16 and 2016/17, 9.20 and 11.50 million bales respectively, 25percent increase over 2015/16.
  • Corn – exports 2015/16 and 2016/17, 1900 and 2050 million bushels respectively, 7.9percent increase over 2015/16.
  • Wheat – exports 2015/16 and 2016/17, 777 and 925 million bushels respectively, 19.1percent increase over 2015/16.

What does a U.S price summary show?

  • Long-grain rice – prices 2015/16 and 2016/17, $11.00 and $10.50 per cwt respectively, 4.5percent decrease over 2015/16.
  • Soybeans – prices 2015/16 and 2016/17, $9.05 and $9.50 per bushel respectively, 5percent increase over 2015/16.
  • Cotton – prices 2015/16 and 2016/17, and $0.58 and $0.59 per pound respectively, 1.7percent increase over 2015/16.
  • Corn – prices 2015/16 and 2016/17, $3.65 and $3.40 per bushel respectively, 6.8percent decline over 2015/16.
  • Wheat – prices 2015/16 and 2016/17, $4.89 and $3.80 per bushel respectively, 22.3percent decline over 2015/16.

Moving into specific crops, let’s first look at U.S. rice.

Long-grain production for 2016/17 was raised 2.0 million from 181 million cwt last month to 183 million cwt, which if achieved would be the second highest on record. The record production was 2010’s 183.3 million cwt.

2016/17 long grain beginning stocks were reduced 2.0 million cwt on an increase in 2015/16 exports to 71 million cwt. 2016/17 long grain exports are projected 81 million cwt which if achieved would the highest since 2005.

Ending stocks are unchanged from last month for long-grain at 38.5 million cwt. This is very troublesome as ending stocks have not been this large since 1985.

The long grain rice season-average farm price remained the same as the previous month in a range of $10.00 to $11.00 per cwt.

Global rice supplies for 2016/17 were raised 0.6 million tons and global ending stocks for 2016/17 are raised 0.4 million tons to 107.3 million.

USDA forecast 2016/17 global trade lower, due to expected reduced imports and consumption in Bangladesh, Iran, and Nigeria.

Brazil is the largest rice Producer in Latin America. In their “Grain: World Markets and Trade Report,” USDA Foreign Agricultural Service staff states: “As the largest producer in Latin America by a wide margin, Brazil has been a net exporter for the majority of the past decade. Reversing the recent trend, it is now projected to become a net importer in 2016 for the first since 2010. At that time, excess rain led to a production decline in Rio Grande do Sul, the largest producing region, precipitating a 20 percent rise in imports. Similarly, this year’s heavy rain impacted the recently harvested crop, now forecast at 7.1 million tons, down 15 percent from last year. Consequently, 2016 imports are forecast to more than double to 750,000 tons, with most supplies likely to come from neighboring countries. Exports this year are projected to fall to 700,000 tons. With Brazil becoming a net importer and presenting less export competition, the United States is expected to seize additional opportunities to expand exports, particularly in the Western Hemisphere. The status of net importer is not expected to remain for long, however. In 2017, Brazil’s production levels are forecast to rebound to levels similar to 2 years prior and return the country to its net exporting position. The forecast recovery this time is somewhat more muted than in 2011, as 2017 exports are projected to rise only marginally from the prior year.”

In Nigeria, there is weaker parboiled trade as national policies restrict imports. In the same report cited above, USDA Foreign Agricultural Service staff state: “In 2014, global exports of parboiled rice surged, but have declined every year since then in response to developments in Nigeria. The large majority of Nigeria’s rice imports are parboiled. This country is the second largest importer of rice and the top parboiled rice importer, accounting for around 40 percent of parboiled trade. Nigeria’s imports spiked in 2014, amid lower global prices and strong demand in advance of local elections. However, the purchasing power has eroded as the oil-dependent economy struggles with foreign exchange availability with sharply lower oil prices. In 2015, Nigeria prohibited the use of foreign exchange to purchase rice and maintained a high import tariff, causing imports to plunge. Since March 2016, Nigeria has banned rice importation via land borders, further tightening access to parboiled rice. These policies are expected to persist, causing Nigeria’s rice importation to further contract in 2017. Parboiled rice is processed to preserve nutrients and results in more separate grains when cooked. It typically accounts for less than 20 percent of all exported rice. Thailand and India are the major exporters, whereas the United States and Brazil ship smaller quantities.”

The bottom line is the U.S. long-grain rice sector will be challenged to move a 2016 U.S. long-grain rice crop this size without significant new business.

Soybeans, cotton, corn

Checking in on soybeans, select USDA 2016/17 WASDE projections show:

  • U.S. oilseed production for 2016/17 is projected at 115.4 million tons, up 2.5 million tons from last month mainly on higher soybean production.
  • Soybean production is projected at 3,880 million bushels, up 80 million from last month due to increased harvested area.
  • Harvested area, which is forecast at a record 83.0 million acres in the June 30 Acreage report, is 1.6 million above the June forecast.
  • The soybean yield is projected at 46.7 bushels per acre, unchanged from last month.
  • Soybean supplies are raised 60 million bushels 4,660 million bushels with lower beginning stocks of 350 million bushels partly offsetting production gains.
  • With increased supplies, soybean crush and exports are raised 10 and 20 million bushels respectively.
  • Soybean ending stocks are projected at 290 million bushels, up 30 million from last month.
  • Soybean exports for 2015/16 are projected at 1,795 million bushels, up 35 million reflecting shipments and outstanding sales through early July.
  • Soybean ending stocks for 2015/16 are projected at 350 million bushels, down 20 million from last month.
  • The U.S. season-average soybean price for 2016/17 is projected at $8.75 to $10.25 per bushel, unchanged from last month.

What about cotton?

  • The U.S. 2016/17 cotton projections show higher production offset by higher exports, with beginning and ending stocks revised down from last month to 3.90 million bales and 4.60 million bales respectively.
  • The 1.0-million-bale increase in the crop projection is attributable mainly to higher planted area as indicated in the June 30 Acreage report, combined with slightly more favorable assumptions about abandonment and yield based on current conditions.
  • Domestic mill use is unchanged, but exports are projected sharply higher due to the larger U.S. supply and an expectation of continued tight foreign stocks.
  • The projected range of 52 to 66 cents per pound for the marketing year average price received by producers is raised 5 cents on the lower end and reduced 1 cent on the upper end; the midpoint of 59 cents is raised 2 cents from last month.
  • A combination of modestly lower production and significantly higher consumption is reducing this month’s global cotton stock forecasts for both 2015/16 and 2016/17.
  • The world carry-in for 2016/17 is decreased 1.8 million bales owing to a sharp increase of 1.5 million bales in estimated 2015/16 China consumption.
  • Recent strong demand for the government’s reserve sales indicates that mills are consuming more cotton than previously estimated. A parallel increase is made in projected China consumption for 2016/17.
  • World 2016/17 production is reduced about 600,000 bales, despite the higher expected U.S. crop, mainly on reduced area expectations for Pakistan and India. Production is also raised for Australia, but is lowered for Greece and Uzbekistan. Smaller foreign crops are raising imports and reducing exports, especially for Pakistan.
  • World 2016/17 ending stocks are now projected at 91.3 million bales, a reduction of 9.0 million from the beginning level.

On to corn with USDA 2016/17 WASDE projections showing:

  • U.S. feed grain supplies were increased for July because lower beginning stocks were more than offset by increased production.
  • Corn beginning stocks for 2016/17 were lowered 7 million bushels as reductions in 2015/16 feed and residual use and use for ethanol production were more than offset by increases in exports and seed use.
  • Corn production for 2016/17 is projected 110 million bushels higher reflecting the increased planted and harvested areas from the June 30 Acreage report.
  • Projected sorghum production for 2016/17 was raised 13 million bushels on higher than expected harvested area.
  • Oats production is forecast 9 million bushels higher and barley production is forecast 10 million bushels lower mostly reflecting area adjustments in the Acreage report.
  • Projected 2016/17 U.S. corn use is raised 30 million bushels as increased prospects for exports and higher seed use more than offset lower projected use for feed and residual and ethanol production.
  • Exports are projected 100 million bushels higher on reduced competition from Brazil, as reflected by new-crop export sales that are well above a year ago.

What does all this mean for near-term market impact?

  • The cotton price seems to know something that most are overlooking, so sit back and watch.
  • Rice needs a new demand source from current and/or new customers, which is not a revelation to most industry participants. Global financial anxiety, geopolitical uncertainty, homeland security issues, etc., coupled with aggressive political focus and industry promotional activities will likely pay dividends.
  • Soybeans, corn and wheat for  the next couple of weeks will likely be fairly turbulent for these respective markets with wheat correcting its downside move, corn exploring its price upside potential, and soybeans correcting its upside price activity. So let’s see how price reacts over the next two weeks.
  • Collectively fiscal and monetary stimulus will likely build over the next 12 months. For this discussion I will stop with 12-months. This type of intervention creates historic unknowns, price uncertainty, dangerous levels of volatility, and market opportunity.
  • U.S. treasuries are very likely to remain sideways given their near-term bullish move (lower yields). This market apparently has not topped.
  • Near-term the dollar should be sideways to up, but the dollar is likely to remain range bound for a number of months. The global currency markets near term are unpredictable.
  • U.S. equities should be watched carefully; let the price define strength, weakness, or simply sideways corrective activity over-time. I expect U.S. equities need additional time to consolidate before moving significantly higher.
  • It is interesting that global reflation has reemerged, which is sooner than I anticipated. I expect that this is going to be an ongoing exercise of risk-on and risk-off for the foreseeable future.

Robert Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected]

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