USDA releases July "World Agricultural Supply and Demand Estimates" (WASDE)—Report Holds Forecast Implications

From the June WASDE to the July report, U.S. wheat ending inventories for 2007 season have changed from rising to falling. Consistent with the new inventory direction, the price outlook has been raised and now stands in record territory. USDA is calling for the farm-level average wheat price to average somewhere in the $4.80-to-$5.40 per bushel price range, up $0.30 on both ends from their June estimate.

Factors that cause the tighter supply situation include lower production, as excessive rains in Oklahoma and Kansas have reduced hard red winter wheat production prospects, as well as quality. Some of the decline in hard red is being offset by strong soft red wheat yields. Prospects for wheat exports continue to improve, as major exporters are experiencing lower production. Canadian wheat export potential was reduced due to a significant shift out of wheat into canola for the 2007 season, as well as revisions to their production estimates from last year that indicate lower supplies. Global wheat stocks are projected to remain at their lowest level since 1981. USDA projects U.S. wheat exports will increase from 910 million bushels to 1,050 million bushels in the 2007/08 season.

If the current scenario of tighter supplies and higher prices during the 2007 season continues to play out, we can expect wheat area to hold, or even increase, for 2008. Record wheat prices can cause winter wheat to cut into cotton and sorghum area in the southern plains and barley in the spring wheat area. Soft red wheat producers will be looking closely at opportunities to double crop wheat and soybeans. The July WASDE report definitely holds support for 2008 U.S. wheat acreage.

Corn and Other Feed Grains

USDA’s picture of the 2007/08 corn marketing season appears to have turned a corner in the July WASDE report. Projected corn ending stocks for September 2008 have been increased from being a flat 1 billion bushels to rising to 1.5 billion bushels. The factor that changed, cause rising stocks was increased acreage. Basically, the 2.4-million-acre increase in corn plantings found in the June acreage report went in the bin or in the pile and are expected to remain there. Price expectations were also modified consistent with the rise in stocks. Now, USDA calls for the farm-level corn price to average between $2.80 and $3.40 per bushel, down 30 cents on both ends from their June estimate. Their previous price estimate had a range of $3.10 to $3.70 per bushel compared with an expected average price for the 2006/07 season of $3.05 per bushel. At this point, the 2007 average corn price is looking to be about flat compared with USDA's earlier expectation of a decidedly higher corn price. Global Insight's forecast has included a flat to marginally lower corn price projection for 2007/08.

Global Insight is currently carrying a higher average yield and lower projected feed demand for 2007, which results in a larger stock accumulation. The July WASDE figures include corn feed use of 5.70 billion bushels in 2007 compared with 5.75 billion in 2006. The 2006/07 level dropped from 6.14 billion bushel due to financial losses in many areas of the livestock sector and significant substitution of Distillers Dried Grains (DDGs) for corn in some livestock rations. Global Insight has livestock feed use of corn around 5.6 billion bushels, and fears it may go lower due to the huge ramp-up in ethanol production slated for the coming season. A recent report issued by USDA on feeding of DDGs showed that pricing of DDGs is highly variable and for beef animals is based primarily off corn; while for dairy, swine, and poultry, prices are a function of both the corn and soybean meal price.

Sorghum and barley planted area was increased due to the June acreage report and yield prospects remain favorable for most all feed grains. Generally, ending stocks projections were increased due to higher production. Feed use for barley and sorghum was increased considerably due to weaker prices and more abundant supplies.

Soybeans

Soybean supplies appear to be getting even tighter than previously expected. Lower acreage in 2007 has pulled soybean ending stocks down from an estimated 600 million bushels in 2006/07 to about 245 million bushels in 2007/08. WASDE puts soybean yields at 41.5 bushels per acre across 63.3 million harvested acres for total production of 2,625 million bushels. Soybean production in 2006 was 3,188 million bushels. The demand situation for 2007 is lower in total, but includes marginally higher domestic crush (up 10 million bushels to 1,800 million bushels) and considerably lower exports at 1,020 compared with 1,080 last month. The reduction in exports is mostly explained by projected lower U.S. supplies compared with a large canola production increase in Canada. We can also expect strong competition from South America in the second half of the 2007/08 season, as they respond to current, favorable economics.

Similar to the growth in corn for ethanol—but at a lower scale—soybean oil used for biodiesel is increasing rapidly. USDA estimates 1,555 million pounds of soybean oil was used to make biodiesel in 2005/06. This level has increased to 2,400 million pounds in 2006/07 and will increase to 3,500 million pounds in the coming crop year. The 2007 projections have 17% of soybean oil production being used for biodiesel, compared with 26% of corn production going for ethanol in the same year. The projected soybean farm price for 2007/08 is $7.25 to $8.25 per bushel compared with a $6.35 per bushel estimate for 2006. The soybean price projection released in the July report is $0.60 higher on both ends of the range.

Cotton

The cotton estimates for the 2007 season saw many changes, but the theme is basically the same: a market struggling to utilize huge beginning inventories. The factors that culminate to create cotton production all saw changes; planted area was reduce a little more than one million acres from June to coincide with the June acreage estimates; while harvested area only dropped 0.5 million acres (acknowledging good moisture in Texas and lower abandonment). Projected cotton yields were also adjusted to reflect the drought in the Southeast, down 20 pounds per acre to 800. USDA projects 2007 cotton production to come in at 17.5 million bales.

Projected U.S. cotton exports for 2007 are now put at 17 million bales compared with 17.5 million in the previous month. The July estimates have U.S. cotton supplies for the 2007 marketing year about even with those of 2006. Basically, the entire drop in production is being offset by increased beginning inventories. USDA does not provide price projections for cotton, but the current estimates lend very little support to higher prices and any significant support would have to come from problems with the cotton crops of China and/or India. At this point, it appears these crops are on target to make trend yields. Farm-level cotton prices are reported to have averaged 47.7 cents per pound to date for the 2006 season, exactly the same as the 2005 average. Global Insight does expect the 2007 cotton price to strengthen some, but the strength will likely come in the second half of the season, too late to provoke much positive acreage response. It looks like the most important driver in determining 2008 cotton acreage is the success cotton growers have with their alternative crops they planted in 2007. The crops arecorn, wheat, and sorghum. Strong economic performance in these crops could cause cotton area to decline further in 2008.

Rice

Projected production for 2007 was increased as planted area came in 100,000 acres above earlier projections. Most of the increase was offset by higher projected exports and the remaining difference went into stocks. The July estimates increased the 2007 rice production to 190 million hundred weight, up from 183 million a month earlier. Projected rice prices were reduced $0.25 on both the high and low ends of their forecast range and now stand at $9.75 to $10.00 per hundred. The average farm level rice price for 2006/07 is estimated to be $9.68. Current market conditions continue to point to increased U.S. plantings of rice for the 2008 season consistent with Global Insight's forecast.