Tale of Two Grains

By Julian Murdoch

Too Much Corn

Corn (C,CBOT) Daily

The price of corn is down, and it is all on supply news.

This spring, farmers put 87 million acres of corn in the ground, and even though planting was late (and, therefore, so was crop development), the current buzz is that it's going to be a bumper year.

As of the August 12 World Supply and Demand Estimates, the USDA is expecting 12.76 billion bushels of corn to be harvested this year, up from last year's 12.1 billion bushels. The jump comes both from the number of acres harvested (80 million this year, versus last year's 78.6 million) and projected yield increases (159.5 bushels/acre, compared with last year's 153.9). Of course, a successful harvest will depend on the weather staying warm and dry, but if it does, corn supplies are projected to hit a record 14.5 billion bushels.

All this means that there's plenty of corn to go around - probably more than needed, especially since the demand picture looks so dismal right now. Demand in the feed sector remains weak, and ethanol demand is questionable at best. Between tight credit and sub-$70 oil, the push for more ethanol is more of a nudge than a shove, unlike the days when oil was over $100 and credit was easy.

However, there is one question mark in the demand picture: high-fructose corn syrup. That compound, much maligned in "The Omnivore's Dilemma" and currently starring in a feel-good PR campaign by the Corn Refiners Association, is a cheap substitute for sugar. With sugar now over 23 cents a pound and possibly on its way higher, we could see new demand, as some food producers increasingly switch over to the lower-cost corn-based sweetener.

Soybeans Up (And Down)

Soybeans, Daily

Soybeans have a different story, and it's as simple as ABC: Argentina, Brazil and China. But first, we need to start at home.

The U.S. soybean supply is at its lowest in five years, with beginning stocks sitting at 110 million bushels in July. Compare that with last year's 205 million bushels, or 2007/08's 574 million bushels, and you can understand why analysts call the market tight.

Adding to last year's supply problems, Argentina suffered a drought and had a dismal harvest for the 2008/09 crop year (ending in June). Only 32 million tons of soybeans were harvested - a 33% drop from the 2006/07 crop of 47.5 million tons. (Brazil also suffered lower soybean production due to drought, although it wasn't hit nearly as bad as Argentina.)

But planting season is coming - and Argentinian and Brazilian farmers have a couple of things going for them as they plant. First of all, soy is the cheapest crop to plant, as opposed to corn or wheat, and the credit crunch is still alive and well in the agricultural sector. Second, the rains are back. Weather forecasters expect El Nino to drop much-needed rain all over Argentina's growing regions by November, right in time for planting. Third, farmers in South America know that the less-than-exceptional U.S. harvest means that all eyes will turn to Argentina and Brazil for their soybean supply.

One country sure to be watching the U.S. harvest is China. Last May, China's demand for old crop soybeans made headlines, and there have been reports of sales for delivery in the 2009/10 marketing year that began on Tuesday. It won't stop here; analysts expect China will continue its usual pattern of stocking up on soybeans during price decreases.

This year, acres devoted to soybeans increased to 77.7 million. Even though crop development is a little slow compared with the five-year average - due to the late planting and unusual summer weather - production should be good. If the weather remains warm and dry while the beans finish developing and are harvested, yields are estimated to be 41.7 bushels/acre or 3.2 billion bushels - roughly 240 million bushels more than last year.

Betting On The Weather

These last few weeks of crop development and harvesting are heavily reliant on the weather. Good weather means high corn and soybean yields - but low prices. Bad weather means lower yields and difficulty drying out a wet harvest, but also the possibility of higher prices. No wonder all eyes are on The Weather Channel.

We've got farmers hoping for dry weather and no frost, so they can get their crops in - and at this point, the bigger, the better for them. Traders, on the other hand, are watching the weather reports as well - but for bad news. If you look at the charts, you can almost tell if traders are betting on frost or not, because at this point in the season, that's what moves the curve. As Chad Henderson from Prime Ag Consultants said about corn's performance last week:

"Everyone who bought last week was betting on a frost. We didn't get it."

As of Wednesday, the weather picture for the next few weeks seems in favor of a good harvest, which corn and soy prices reflected. As of 2:16 p.m. on Wednesday, December corn had dropped 2.25 cents to $3.17 a bushel on the day, and November soybeans dropped 3.2 cents to $9.522 a bushel.

Already Looking Ahead

This year's corn and soybean harvest isn't even complete yet, but that hasn't stopped farmers from planning what to plant next year. A recent survey by Farm Futures indicates that next year, farmers may move away from planting soybeans and plant more corn - even though the corn/soybean price ratio favors soybeans.

Of course, since much of this year's crop is still in the field, plans may change, especially as the market prices factor in the harvest. More than any other time of the year, this critical pre-harvest period is really just a bet on the weather.

Comments

[Mad Hedge Fund Trader]

tyui. I drove over the Benicia Bridge yesterday, and saw ships lined up at the silos, sitting high in the water, waiting for transport our record wheat surplus to hungry China. After looking at barge schedules for the Columbia River, weather forecasts for Australia, and planting schedules for Texas and Kansas, I am getting more excited about buying December Wheat under $5 (click here for more background). The Southern planting schedule starts on September 1, and the financially weakest farmers will have to sell whatever they have in storage to pay for the new season’s seed and chemicals. This will give us the inventory clear out we need to allow prices to work higher by year end. The greatest growing conditions in living memory have driven prices for this basic foodstuff from last year’s spot high of $13 to the current low of $4.90. Philosophically, the cynic in me loves shorting “Perfect,” like the “Perfect” growth in Japanese bank earnings in 1989 (remember Japan as Number One?) and the “Perfect” business models I saw in dotcoms in 2000 (remember the “infinite revenues, zero cost” pitch?). You might get a buck out of wheat by year end, and more if conditions become less than perfect. Aren’t we supposed to see an El Nino winter (click here for details)? And you never know when the long term food shortage is going to kick in, where the sky will be the limit for prices (click here for details). View the recent spike in sugar prices as an appetizer, not a dessert. Remember, the Fed can print money, but not calories.

2009 Sep 04 09:34 AM

[samiscrazy]

U.S. soybean supply is at its lowest in the past five years?? i think production is high ....

2009 Sep 08 12:39 AM