Newsom on the Market
Demand Deguello
The Spanish word "deguello" has a figurative translation of "give no quarter." It's also famous historically, not only for being the title of an old ZZ Top album, but also as the name of a bugle call favored by the Mexican army in the early 1800s. Deguello is significant again because this year's annual Commodity Classic conference is being held in San Antonio, Texas, the home of the historic Alamo. And if history books are correct, Deguello -- the bugle call, not the ZZ Top album -- was likely the last music heard by the mission's defenders that early March morning almost exactly 181 years ago (March 6, 1836). After creeping to within mere feet of the Alamo's walls, General Santa Anna's forces were urged forward by the repeated playing of the blood-curdling tune.
As I said before, this week found Commodity Classic back in one of my favorite (recall, I'm a history buff) cities. The convention is the annual conference for the National Corn Growers Association, American Soybean Association, National Association of Wheat Growers, National Sorghum Producers and Association of Equipment Managers, and is attended by producers and businesses in all aspects of ag business from across the U.S. (and some neighboring countries as well). While I was not an official speaker at the conference, I did have the privilege to be part of two early-morning breakfast meetings for John Deere and the National Corn Growers Association, held on separate days.
What was my message? The same as it was for the annual DTN/The Progressive Farmer Ag Summit in Chicago last December. It was a similar message to what I shared with my friends in Bowling Green and Murray, Kentucky, this past January. And reminiscent of what I talked about in Louisville, Kentucky, a couple of weeks ago at the National Farm Machinery Show. Oversupply. An oversupply of oversupply.
It didn't matter if the group I was in front of was more interested in corn, or soybeans, or wheat; the bottom line was/is the same: U.S. agriculture is facing an unprecedented grain oversupply situation that is having ripple effects throughout all ag business.
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The numbers, as we know them, are almost beyond comprehension. Four consecutive years of record-large production has USDA projecting 2016-17 marketing-year ending stocks of corn at 2.320 billion bushels and soybeans at 420 million bushels. Factoring in demand projections, ending stocks-to-use are estimated at 15.9% and 10.2% respectively. Both are at or near the high end of final calculations since the beginning of corn's ethanol-driven demand market back in 2006. Just a refresher, the higher the ending stocks-to-use, the more bearish the overall supply-and-demand situation.
A case in point is wheat. Though the Chicago Mercantile Exchange (CME) has tried to alter the reality of strong carry in the Chicago wheat futures spreads through its Variable Storage Rate (VSR) program, the March-to-May spread recently saw its carry move to 20 cents. USDA, to its credit, continues to echo the real message of Chicago wheat's strong carry with its latest ending stocks-to-use estimate of 50.2%. Yes, you read that correctly: Ending stocks of all U.S. wheat would cover over 50% of total demand. Just as it did the previous marketing year, despite U.S. growers planting almost 5 million acres less in 2016. Another 4 ma could go elsewhere when all is said and done in 2017.
The only way out of this oversupply situation, since set-aside isn't going to do it, is to maintain the record pace of demand we've seen through the first two quarters of the 2016-17 marketing year for corn and soybeans and the uptick in demand that is expected to occur over wheat's last quarter (March through May).
In its February round of reports, USDA pegged total corn demand at a record 14.620 bb. Year-to-year increases are projected for feed (9%), ethanol (3%), and exports (17%). Regarding feed, cattle on feed continue to run about 1% ahead of last year in each monthly report. Ethanol production continues to churn at a record pace, using much more corn than last year, and total export shipments are 66% ahead of last year for the same time. When the March 31 Quarterly Stocks report rolls around, we could be looking at shockingly good first-half demand.
Similarly, soybean crush has been strong since last September and total export shipments are running 16% ahead of last year. In its February report, USDA predicted exports to see a marketing year-to-marketing gain of only 6% with total demand growing 4% to a record high of 4.108 bb. But as the last three years have shown, USDA tends to overestimate ending stocks by roughly 64% from its marketing-year high through the final September quarterly stocks figure. Usually, this is due to grossly understating demand projections.
All of this illustrates that we -- the U.S. -- are trying to work our way out of an oversupply situation, one that could be made worse if early forecasts are correct and 2017 sees a fifth consecutive year of record corn and soybean production. We just can't have threats, real or imagined, to demand. Yes, the U.S. dollar should get stronger given the higher likelihood that the Federal Reserve raises interest rates next week. That's inevitable given the overall economy has been improving for some time.
What doesn't have to happen is the constant war of words with key U.S. grain trading partners, so far amounting to no more than childish arguing. But what happens if real action is taken by any of the sides involved? That's what all the associations gathering in San Antonio are hopefully discussing. If cooler heads prevail, 2016-17 could see U.S. demand deguello. In other words, demand giving no quarter. And lighten the oversupply load along the way.
Sound the bugles.
Darin Newsom can be reached at darin.newsom@dtn.com
Follow Darin Newsom on Twitter @DarinNewsom
(BAS/AG)
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