FARM BILL FLASH A newsletter on farm programs, farm policy & market insights November, 1999 By Jon Newkirk, Extension Economist A Market Outlook I'd Rather Not Write. I've about given up hoping for good news to report. Back in the June issue of this newsletter I wrote, "I think this is the year to pay very close attention to the supply and demand reports." Unfortunately I didn't know it was going to be such a depressing experience. Each month since June, estimates of ending stocks just keep going up. As we stand today, U.S. wheat stocks are expected to grow during this marketing year (Graph 1). To make matters worse, U.S. corn stocks are expected to increase at least 170 million bushels (Why feed wheat when corn is so cheap?). Barley stocks will decline a wee bit but the barley stocks-to-use ratio is still above 40%, way too high for much help in feed grain markets and likely to keep malt barley prices down as well. Last May it looked like white wheat stocks would approach 74 million bushels by June 1. Instead they ended up at 89 million bushels. But what hope there is comes from the white wheat balance sheet that shows white wheat ending stocks are predicted to decline some 9 million bushels to 80 million bushels. White wheat exports are expected to drop off by 20 million bushels this year. If exports of white wheat pick up (not very likely given the strong dollar and the size of Canada, Australia, and Argentina's crop), such that ending stocks would approach 70 million bushels, there might be some upward pressure on white wheat prices. Unfortunately ending stocks of soft red wheat, white wheat's primary competitor, are estimated to grow another 43 million bushels on top of the 56 million bushels they increased last year to a total of over 179 million bushels. The U.S. soft red wheat stocks-to-use ratio is a whopping 44%. Another glimmer of hope is that world wheat stocks will decline a third year in a row, definitely one trend headed in the right direction. (Graph 2). The 97/98 marketing year world wheat ending stocks were 139 mmt., the 98/99 were 136 mmt., and in this marketing year stocks are expected to decline to 128 mmt. However, the world wheat stocks to use ratio will be in the 22% range, well above where world wheat buyers begin to get worried about their supplies. So what's my conclusion? Things must look darkest just before the dawn because this couldn't look much worse. The fundamentals do not hold out any hope for upward price movement so it will have to be something else that moves the market. Weather and declining acreage are about the only hope. Some are speculating that if the dry fall is followed by a dry winter and spring, even that won't provide much of a weather market. So don't expect much movement till spring, if then. But what are others saying? I've provided the Web Urls in the past for some of my favorites but thought I'd highlight some thoughts that I think explain in different ways the bad news. When it's bad news, better another messenger than me! Kim Anderson, Agricultural Marketing Economist, at Oklahoma State University publishes an on-line monthly Wheat Outlook Report. On Oct 12, 1999 Kim wrote, "I was going to do a "good news", "bad news" list but there just isn't much good news. The bad news is low prices, high stocks (wheat & feed grains) and weak demand. "What will it take to get prices back to average (~$3.55)? The key number is ending stocks (Remember, he is an economist!). Both the 5 and 10-year U.S. wheat ending stock average is 600 million bushels. For Oklahoma prices to average $3.55 per bushel, wheat-ending stocks must decline to about 600 million bushels. "The USDA projects May 31, 2000 wheat ending stocks to be 987 million bushels. This is 387 million bushels above average. For prices to reach $3.55, wheat stocks must be reduced by about 387 million bushels. "A reduction in stocks could result from reduced production and/or increased demand. The 10-year average U.S. wheat production is 2.34 billion bushels and the 5-year average is 2.36 billion bushels. To reduce ending stocks 387 million bushels, production in year 2000 would have to be 1.96 billion bushels or less. Since 1975, U.S. wheat production has been below 1.96 billion bushels only two times. Wheat production in 1978 and 1988 was about 1.8 billion bushels. The odds of 2000 U.S. wheat production being below 1.96 billion bushels is low. . ." You can read Kim's entire newsletter at http://www.dasnr.okstate.edu/market/. Kim's analysis helped me put into perspective the odds of a major price jump this marketing year. It is not very likely. Maybe not next year either without a major disaster someplace. The U.S. produces between 11% and 13% of the world's wheat. That means many, many other non U.S. wheat producers have an impact on our wheat price. The USDA Foreign Agricultural Service (FAS) has a very informative Web page where you can keep up with the crop weather around the world, the condition of our major competitors crop conditions and more. The recent FAS SITUATION AND OUTLOOK online report started out with (the underlines are mine), "World wheat trade in 1999/2000 is projected at 100.2 million tons. This is the seventh consecutive year that trade has been around this level although prices have fluctuated between record highs and near record lows. Slightly higher U.S. exports will face strong competition from Canada, Argentina, and Australia due to bumper harvests. Global production is down from the 1997/98 record, owing to smaller crops in several key importing countries, as well as the United States and the European Union. For the first time in nearly a decade, global consumption is forecast slightly lower, as the growth in food use is overshadowed by a decline in wheat used for feeding. (Too much cheap corn!) Nevertheless, consumption is still forecast to exceed production for the second year in a row and consequently ending stocks will be drawn down. However, stocks in the major exporting countries will remain large, limiting any price increase." I thought the historical perspective in this analysis was helpful especially that the drop in world wheat consumption, the 1st in 10 years, is caused by less wheat being fed to animals. ((Do you follow corn markets?)) Read it all at http://www.fas.usda.gov/currwmt.html. Graph 3, which I "borrowed" from the FAS Web site, shows graphically that Australia and Argentina, two major white wheat competitors, will have more grain available for export this year. In the FAS Weather section I found the following two quotes, "During September, wheat in Argentina normally advances from the vegetative to the heading and reproductive stages, while planting of corn, sunflower seed and cotton begins. For September 1999, rainfall amounts were favorable across the major wheat areas, while clear weather favored planting." And then the heading on the Australia weather, "Australia: Conditions Remain Generally Favorable As Winter Grain Harvest Begins." Read the entire report at http://www.fas.usda.gov/WAP/circular/1999/99-10/wap2.htm. As I've written before, Jim Hilker at Michigan State University keeps up one of my favorite market web pages. His page takes a different approach. Every week or two, the Michigan State folks plug the SRW options prices from the Chicago Board of Trade into a computer model which in turn gives back a "probabilistic forecast" for the futures market. While based on soft red wheat markets, it is instructive for us in the PNW because our markets in general move with the rest of the U.S. wheat markets, and many here hedge using Chicago contracts. In addition to the probabilistic forecasts, Jim does a brief, but instructive commentary on supply and demand fundamentals. The Hilker Web site has one of the clearest, easiest to read, balance sheets I seen anywhere. Jim's point price forecast for the US average wheat price is that this year's average price will be $0.10 less a bushel than last year.; On Oct 15, 1999 Jim wrote, "The USDA had to make significant changes in their Wheat Supply/Demand Report as well due to the quarterly Stocks Report (The Sept. USDA Grain Stocks report). Feed use for the June 1- May 31, 1999-2000 marketing year was lowered from 325 million bushels to 250 million. (again cheap corn!) This, along with the marginal increase in production reported, increased the ending stocks estimate by 87 million bushels. This puts ending stocks as a percent of use at 41.4 percent. Just when we thought wheat ending stocks were on their way down, they continue to increase." The Hilker probabilistic forecast looks at the next three Chicago future's contracts. Today those would be the December, March and July SRW contracts. The explanation of the December forecast shown on Graph 4 is as follows. "There is a 10% chance that the price will be higher than $2.90 (a 90% chance the price will be less than $2.90. On October 19 when this forecast was run, CBOT December contracts were $2.63.) and a 10% chance that the price will be less than or equal to $2.37. This indicates that there is an 80% probability that the price will fall between these two prices (a $0.53/ bu. Spread, 26.5 cents up and 26.5 cents down). There is a 50% chance the price will be less than or equal to (or greater than) $2.62." The underlying concept behind this computer model is that the options market gives a strong indication of what the market will do in the future. In other words, the combined wisdom of all the buyers and sellers of SRW options at the Chicago Board of Trade somehow is expressed in what buyers and sellers of those options are willing to pay. That is, the market knows best. I use the probabilistic forecasts to provide a framework, to place some parameters on how much prices might move up or down. Let's read a little further. The forecast (not presented here) on the March contract suggests, "There is a 50% chance the price will be less than or equal to $2.76." I draw from these two forecasts that by March, there is a 50% chance or better, that the price will only move up $0.13 cents a bushel. Are those odds I'd want to gamble keeping grain in storage for? The probabilistic forecasts will at first look like a foreign language but soon will be easy reading. You'll have to extrapolate to PNW white wheat prices, but many of you do that every day. The fit isn't perfect, but better than most other information we have access to. Just think about the "odds". Find it all at http://www.msu.edu/user/hilker/. And finally, given such a lousy price outlook, how do you plan to invest your Market Loss Payment? I know you don't believe me on this issue, but the "odds" of the price rising 50 cents by spring may be better than the Congress coming up with another large payment next year. (What are the odds of 3 large emergency appropriations in a row?) What is your prediction on the budget surplus existing next year? In July, some in Congress said there would be no chance at another emergency farm aid package (beyond the one just passed) if the budget surplus disappears. Use these funds to bolster or improve the financial health of your farm/ranch business. Cash flow may be tight again next year. If it were me, I'd pay down debts; improve cash reserves so I can manage spring, summer and fall production costs; drive the pickup another year; or invest in capital items that lower the per unit cost of production on the farm. I would not purchase equipment just to lessen what I owe Uncle Sam on my 1040F. This is the list of graphics that are not available in the text version of the newsletter. Graph 1. US Wheat Ending Stocks Graph 2. World Wheat Ending Stocks Graph 4. December Hilker Probabilistic Forecast Graph 3. Grain Available for Export, Australia, Argentina WSU Cooperative Extension, 210 W. Broadway, Ritzville, WA 99169 Ph: 509 659-3211 Fax: 509 659-3303 E-mail: jnewkirk@wsu.edu Member, WSU Cooperative Extension Ag Horizons Team Cooperating agencies: Washington State University, U.S. Department of Agriculture, and Lincoln, Adams and Spokane Counties. Cooperative Extension programs and employment are available to all without discrimination. 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