Economic struggles in the U.S. and world financial markets and a bearish crop report have taken center stage in the grain markets, according to Brian Hoops, market analyst with Midwest Market Solutions, speaking at the Minneapolis Grain Exchange press briefing on USDA’s Oct. 10 crop production report and supply and demand estimates.
The October report is the first grain report of the year based on actual ear and pod counts. It will be followed in November by reports based on harvesting data from producer surveys.
USDA pegged U.S. corn production at 12.2 billion bushels, which would be the second largest production in U.S. history. Yield, at 154 bushels, is an increase from September of 1.7 bushels per acre, and 2.9 bushels better than a year ago.
According to Hoops, parts of northern Illinois and most of Iowa are experiencing some of the best corn and soybean yields they’ve had in several years.
A piece of good news is that even with the large crop, “we are not producing enough to meet total usage, estimated by USDA at 12.685 billion bushels,” Hoops said.
But there are signs that the financial crisis could start to weigh on that demand. “The bad news is that USDA also dropped the average price forecast for corn significantly due to prices falling substantially and to expectations that demand starts to decrease in 2008-09.”
USDA’s October forecast for soybean production would be the fourth largest crop in history at 2.983 billion bushels, “which is considered a little bearish on the surface because it was larger than what the trade had anticipated,” Hoops said. “Average yield is actually down from last month and 2.2 bushels lower than 2007. So USDA is recognizing some crop problems with the crop itself. However, they did increase harvested acreage from last month by 3 percent.”
Meanwhile, ending stocks for soybeans moved higher than a year ago and last month. “Last month, we were looking at 135 million bushels of ending stocks, which is a very tight number. USDA found more bushels than expected in the quarterly stocks report, which gives us a substantially larger supply number of 220 million bushels.”
USDA also lowered the average price received by $2 a bushel from last month based on what soybeans prices have done over the last month.
Hoops says that wheat “is going to be a follower of corn, soybeans and what the economic markets are doing. Ending stocks are larger than a month ago, at 601 million bushels, which was above the average trade guess.”
Globally, soybean carryout is much larger than a month ago at 55.2 million metric tons, an increase of 4 million metric tons. Wheat is 4.5 million metric tons higher than a month ago. Corn decreased stocks by 2 million metric tons because of production problems around the world, mainly the Argentine growing area.
Hoops says end users will slowly start buying weakness in the grain markets over the next few weeks. “They’re really not in a rush to get inventory around them. They purchased quite a bit this spring as quite a few farmers sold as prices moved higher. As we go through this winter, supplies may become a little tighter if farmers are stubborn in their selling. In that case, the end user may have to bid up the price. But over the next several weeks, it looks like there will be enough supply moving through the pipeline. There is not enough demand for the end user to have to step forward with aggressive forward coverage at this time.”
Hoops noted that farmers are extremely disappointed in current prices in grain “because they’re below their cost of production. The cost of fertilizer has gone up and cash rents and land values have gone up. That may not be true for farmers who own their own land.”
Hoops does not believe that the markets have to rally significantly to buy grain acres next spring. “We’ll probably see a small battle for acreage between corn and soybeans. We probably won’t start trading that until we get into the January-February time frame.”
Noting that USDA dropped U.S. ethanol use by 100 million bushels, Hoops said, “I think it could go down even further, depending on the election this year, and if there are reductions in the ethanol mandates. And as gasoline prices creep lower, we could see demand wane as well.”
When asked if commodity prices going lower might present an opportunity for commodity funds to re-enter the market, Hoops noted, “The funds are so beaten up right now. They’ve lost a lot of money this last year, and they’ve lost a lot of confidence over the last several months as well.
“We’re going to have to see a market that has proven a bottom and has started back into an uptrend. That’s going to take a significant rally. You have to have corn close above $4.68 in the December contract and soybeans close above $10.35 in November before you can entice the funds to get back into the market. Right now, they are in liquidation mode and will continue to sell rallies until the financial crisis has been worked out.”