Most folks already knew, but the statement still hit with a whoosh, like air suddenly rushing out of a hot air balloon high above the world. “The inflationary bull market in the commodities is over,” says grains analyst Richard Brock.
One bit of good news is that the grain and soybean markets are somewhat recession proof, if indeed recession adequately describes the general state of the world economy these days. “The good thing is that people still have to eat,” Brock said, adding, “I think those in the livestock industry are going to have a good year. Poultry, pork and beef supplies are down. We could see feeder cattle prices rise as grain prices drop.”
The jury is still out on where corn and soybean prices are headed from here, according to Brock. Last year, corn producers harvested 78.6 million acres. With an average yield of 153.9 bushels per acre, they produced a crop of a little over 12 billion bushels.
“We will use about 5.3 billion for livestock feeding. Livestock numbers are down, and since the ethanol plants have geared up, we’re using a lot more DDGs (distillers dried grains) in dairy and cattle feed.”
Meanwhile exports are running 40 percent under a year ago for corn and expected carryover is 1.79 billion bushels versus last year’s 1.625 million.
“The variable to watch is yield,” Brock says. “Last year, we had an average yield of 154 bushels and the majority of the corn crop was planted six weeks late. What could happen if it’s planted on time this year? The genetic improvements coming along in corn are truly unbelievable. From the 2000 to 2030, the technology companies are projecting that corn and soybean yields will double. This year, they are estimating a 7 percent to 10 percent increase in the national average yield for corn, and about 6 percent for soybeans.”
For 2009, a 156 bushel per acre average corn yield on 86.5 million acres would produce a corn carryover of 1.5 billion bushels, a stocks-to-use ratio of 12.4 percent and a price of around $3.75 per bushel, “which is also about where the market is now.”
“Putting on the bull hat for a minute, if we plant only 82.5 million acres and have weather like we did this past year, an average national yield of 154 bushels would drop carryover to about 700 million bushels and you get $6 corn. I’m not saying that’s not possible, but you would have to have a lot of bad things happen — low planted acreage and a really bad growing season. The odds are it won’t happen.”
A bearish scenario could occur if 84.5 million acres of corn are planted on time and yields are 163 bushels per acre. Carryover would climb to over 2 billion bushels and corn prices at harvest would be $2.50 or less. Essentially, any kind of good corn crop this year, and you’re looking at sub-$3 corn.”
“I know you don’t want to hear it, but we’re in the midst of a big recession or depression. We’re not immune to those outside factors. Corn exports are down 40 percent and that’s not going to improve anytime soon. This is still not cheap corn.”
Brock says producers should consider selling some of their new crop corn now and hope for a spring or summer weather rally.
On the other hand, ethanol demand continues to help buoy corn, notes Brock. “In 2006, ethanol plants were making almost $3 a gallon. Everybody jumped in at the top, and right now they can’t make any money because the ethanol is just too cheap at $1.54 a gallon.”
Despite problems with profitability in the ethanol business, “it’s not going to go away,” Brock says. “We have the mandates out there, and I don’t think that Obama will change the blenders tax credit. We may increase the amount of ethanol being imported. But that’s not a big deal. We’re going to have the demand there, but the profit margins are going to be negligible. We’ll get up to about 4 billion bushels in usage and level off.”
Soybeans could be a different story, according to Brock. “Carryover is tight at 210 million bushels. Old crop beans and new crop beans are two different markets. The spread has been crazy.”
Under a bearish scenario, “if farmers plant 78 million acres, carryover jumps from 210 million bushels to 524 million bushels. Put the acres at 79 million and the yield at 43 bushels, carryover goes to 759 million bushels. There are some analysts who believe we will plant 80 million acres, which could produce a billion bushel carryover next year.”
On the bright side, soybean exports are running 10 percent above a year ago, with much of that going to China.
Wheat acres are projected to decline to 60 million acres in 2009, but carryover will continue to hover around 70 million bushels. “The trend for wheat right now is sideways. It’s already discounted a lot of the negative fundamentals. Relative to corn and beans, wheat probably doesn’t have as much downside risk. But if beans and corn trend down, wheat will struggle to stay up.”
The market is getting harder and harder to predict, Brock says. “Long-term these days is three months. Short-term is tomorrow. And it’s going to be volatile. So stay flexible and don’t get married to any one marketing strategy. What worked last year will not work this year.”