Grain Prices Require Substantial Support to Overcome Bearish Fundamentals

Yesterday morning, the USDA published their annual Prospective Plantings report and their quarterly Grain Stocks report, which provides market participants with key fundamental information to better position themselves for the upcoming season. Here is a summary of the estimates and price implications:

Corn

Corn acreage intentions are down 1% from 2008 plantings to 85 million acres, slightly higher than the trade’s expectation of 84.548 million. While the consensus for a reduction was realized, this is still an impressive number in the face of expensive inputs, tight credit and a locked-in soybeans:corn ratio that favors bean acres for most growers’ crop insurance policies. While total stocks are up only 1% over last year, “on-farm” stocks (held at mills, elevators, warehouses, terminals, and processors) are up 8%, and off-farm stocks are down 7% year-over-year. This tells us that growers will still be looking to sell into price rallies to unload their remaining old crop.

Soybeans

Bean acreage intentions are up marginally from 2008 plantings to a record 76 million acres. This number is 4% lower than the trade’s expectation of 79.251 million. On-farm stocks are up 11% versus last year, while off-farm stocks are down 23% from 2008, reflecting marginal Chinese purchases diverted to the US from South America. This boost in demand is attributable to the farmers’ strike in Argentina and drought impacts for both Argentina and Brazil. The combination of record soybean acres and a return to normal export balances later this year implies a substantial expansion of US supply for 2009/10.

Wheat

Spring wheat acreage intentions are down 6% from 2008 plantings to 13.3 million acres. However, the wheat story is dominated by ever-growing supplies: on-farm stocks are up a whopping 205% over last year, while off-farm storage is running 23% above last year’s levels. The price effect of this supply surplus is exacerbated by the weakening demand picture. The USDA’s recent estimate of wheat-consumption-for-food was reduced to its lowest level since the 2005-06 marketing year. The weather risks to winter wheat and spring wheat this year will have limited impact on prices until renewed consumption can eat through existing supplies.

Bottom line: grain prices will require substantial support from a weaker dollar and institutional investment to overcome bearish fundamentals.

Disclosure: no positions

Comments

[manuel:]

does anybody know what is Best for Potash? Corn or Soy? Some say corn is better for nitrogen producers. But corn uses the highest amount of of the three combined(potash nitrogen phosphate), so I wonder if soy alone uses more Potash than on an acre of corn.

www.forbes.com/2009/02...

Apr 01 11:20 AM

[Think-About-It:]

Maneul,

Corn acres consume roughly 5.6 times more fertilizer than soybeans and 2.5 times more nutrients (measured by pounds/acre, combined nitrogen + phosphate + potash) than wheat. Wheat in turn consumes roughly 2.2 times as much fertilizer as soybeans.

--From StormX website

Apr 01 05:00 PM

[huskerbob:]

Take the report with a grain of salt: this early the planting season in the corn belt is not yet underway, so changing inputs and crop prices can still have a major influence.
Manuel: Many farmers use cheaper inputs as a justification to plant soybeans, which will gross less $ per acre than corn. Often beans are planted with a bare minimum of fertilizer. Ground planted to corn can see nitrogen and other nutrients applied three times over the course of a year. Corn is massively more bullish for all crop input producers.

Apr 01 07:44 PM

[nova:]

"Bottom line: grain prices will require substantial support from a weaker dollar and institutional investment to overcome bearish fundamentals"

What does it mean?
Is it good or bad for MON, POT, AGU, MOS and why?

Apr 01 11:41 PM

[Jordan Rizzuto:]

nova,

The fertilizer companies' earnings power is levered to these grain prices. If you trade or invest in the names you list here, following these fundamental drivers will assist you in estimating future profitability.

For example, fertilizer companies that have a heavy revenue concentration in nitrogen will be very sensitive to corn prices, as corn requires much more fertilizer relative to the other grains. Higher corn prices (relative to soybeans) will give producers incentive to plant more corn acres. This in turn will boost marginal demand for nitrogen, and its distributors will have greater pricing power in a bullish price environment.

You can follow the daily weather impact and seasonal market influences on grain production at stormx.com/agriculture.



On Apr 01 11:41 PM nova wrote:

> "Bottom line: grain prices will require substantial support from
> a weaker dollar and institutional investment to overcome bearish
> fundamentals"
>
> What does it mean?
> Is it good or bad for MON, POT, AGU, MOS and why?

Apr 03 01:02 PM

[nova:]

Jordan Rizzuto,

Thanks a lot. It is very helpful.

Apr 05 12:18 AM