I co-authored this for Inside Supply Management magazine.
WEATHER BOOSTS PRICES OF CORN AND SOYBEANS
by Stanly, Foreman, & Nicholson
Inside Supply Management
September 2005
Dry weather in the eastern half of the corn and soybean belt has been the principle element in sharply boosting grain and oilseed prices over the course of the summer. From planting-time to mid-growing season corn prices rose 13 percent, while soybean prices saw 15 percent appreciation. Now, however, temperature moderation accompanied by much-needed rainfall has tempered the markets, settling them down to the price levels of last May. Through this time period large speculators or hedge funds, as they are commonly referred to, have built long or ‘buy’ positions in both markets, further supporting prices. And, with declining stocks-to-usage ratios, corn and soybean prices are both expected to be about 20 cents per bushel higher in the 2005-06 crop year which is now beginning, than they averaged in the past 12 months.
Corn Supplies Lower But Adequate
Despite an advance to 81.6 million planted acres, corn production for the 2005-06 crop year is now projected to be 10.03 billion bushels, down sharply from last year’s 11.81 billion bushel record. Average yields are set at 135.4 bushels per acre with projected reductions expected in 29 of the 33 corn-growing states. Last year’s yields were 160.4 bushels per acre. Nonetheless, there are ample supplies, with a total supply of 12.26 billion bushels this coming year, compared to supplies of 10.58 to 12.78 billion bushels in the past five years. Improvement in exports will take a bite out of these supplies and offset the dip in domestic usage driven by lower animal inventories. Corn usage in ethanol production has doubled in the past three years, and will claim about 15 percent of all 2005-06 production. These dynamics should leave stocks of 1.42 billion bushels at the end of the coming crop year, which is certainly adequate for the commercial pipeline.
The USA’s key competitor in the global corn trade is Argentina, whose production is likely to be 10 to 14 percent lower this year. Another key factor in the global market is China which, at 127 million metric tons of corn production, is again consuming more than it produces. These factors deserve monitoring, as does global coarse grain stocks which may approach historic lows this coming year.
Buying Strategies Driven by Technical Factors and South American Production
While the crop has been damaged by extreme heat and dryness through a large portion of the central and eastern corn belt, the risk premium for production well below 10 billion bushels has evaporated. With harvest about to begin, seasonal pressure may hold rallies in check. Buyers may expect December corn futures to find support in the $2.15 to $2.20 range. Longer-term, buyers should expect stronger export demand, tightening USA and global ending stocks, and a smaller Argentine corn crop to support prices this fall and lead a seasonal recovery through the winter and into the spring.
While most coverage for the October through December quarter should be in-place, there is not a pressing need for buyers to cover into calendar 2006 at this point.
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USA Soybean Production Lower But Not Problematic
We have seen the lowest planted acres to soybeans this year since the 1998-99 crop year. Accompanying this are yields, while good at 38.7 bushels per acre, are no better than the upper-end of the range of the past 10 years. Last year’s yield of 42.5 bushels per acre was a record. Production in the 2005-06 crop year is projected to be 2.78 billion bushels, contrasted with 3.14 billion bushels in 2004-05, and 2.45 billion bushels in the 2003-04 crop year. The story behind this year’s numbers is the dryness in the Midwest. The key growing state of Illinois received only 60% of its typical early and mid-growing season rainfall this year and faces some of it’s poorest yield prospects since 1988. Beginning stocks for the coming 2005-06 crop year are a healthy 263 million bushels, which aids in moderating the effect of strong domestic crush, pegged at 1.70 billion bushels. The good flow of exports, at 1.05 billion bushels, have been buoyed by weakness in the dollar as compared to the currencies of key USA soybean customers. Exports were recently running about 25 percent ahead of last year’s pace.
Global competition to USA vegetable oils produced from soybeans has surfaced from sunflowerseeds, which are projected to rise in 2005-06 to a near record 27.2 million metric tons of production. And, world output of rapeseed, forecasted to be 43.1 million tons due to good crop conditions in the EU and Canada, will also weigh on market prices. These improvements are offset somewhat by the 3.2 percent soybean planting reduction in Brazil, the second-largest global producer of soybeans. Overall, global vegetable oil production is growing at 6.94 percent per year, just keeping-up with consumptive growth of 6.88 percent.
Some Soybean Coverage Is Now Warranted
The soybean market of late has had difficulty in finding direction. A key question is whether late-season rains were enough to help yields or was it “too little too late”. It may be the latter, but at least those rains stabilized the condition of the crop and prevented further deterioration. Technical market analysis suggests that the soybean market is currently in a $5.65 to 6.50 per bushel range. Buyers could cover their October-December quarter needs at the lower-half of this range, and pursue covering up to one-third of their needs into 2006 on opportunistic ‘buys’.
