Natural Disaster and USDA Reports Weigh on Grain Markets

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The devastating earthquake and tsunami wreaked havoc on Japanese ports, feed mills, and livestock operations in early March, sending a shock through the financial markets, including the grain markets. Japan is the largest importer of U.S. corn; there was a lot of pressure on the corn prices in the days following the quake.

The short-term effects of the quake included damaged ports and decreased demand for grains, but the outlook on the port damage is not as severe as initially estimated, and imports may be deferred to other ports in Japan to accommodate.

The long-term effects of the Japanese disaster have not yet been totaled. Radiation that has been emitting from the damaged nuclear reactors could potentially harm farmland near the power plants for more than 30 years. Radioactive material can deposit in the soil and continue to emit radiation to growing plants for decades. This radiation can then be ingested by humans who eat the crops grown on the contaminated soil. Japan is the second largest buyer of U.S. wheat and rice while the third largest buyer of U.S. soybeans.

Besides the Japanese quake, grain markets were greatly affected by the March 31st USDA reports consisting of Prospective Plantings and Quarterly Grain Stocks. The reports came as bullish news for corn, soybeans, and wheat, as grain prices increased up to 5% following the reports.

Grain Prices
Corn prices decreased by 4.2% in March and closed at $6.93 per bushel due to the Japanese disaster and continued unrest in the Middle East. Corn prices for May delivery fell by 18.5% following the quake only to recover mid-month making up nearly 75% of its loss, largely in part by other importers buying grain at low prices. Domestically, corn stocks remain tight, with USDA estimated ending corn stocks for 2010/11 at 675 million bushels. The end of the month USDA quarterly stocks report helped drive prices limit up, but it wasn’t enough to make up all the ground lost earlier in March due to the quake.

Soybean prices increased by 4.0% in March to $14.10 per bushel due to the acreage battle between corn and soybeans. Farmers, particularly in the South, have been debating between planting cotton or corn while soybean acreage has been cut in the Corn Belt due to the high price of corn. The price of soybeans has also been affected by the mid-month foreign demand that purchased U.S. grains while taking advantage of the low prices, similar to the corn markets.

Wheat prices also declined this month to $7.63 per bushel, a 2.5% decrease. The price of wheat decreased alongside corn and soybeans after the Japanese disaster. Wheat prices strengthened mid-month on growing foreign demand which was fueled by export cuts in the FSU. The USDA acreage report revealed higher than expected spring wheat acres to be planted in 2011, but the bullish report for corn and soybeans helped support a rally in wheat to close out the month.

WASDE Report
The USDA updated the U.S. and World balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates WASDE report in mid-March. March’s report is typically quiet, but growing grain demand has kept each WASDE report under close watch.

Corn ending stocks in the U.S. went unchanged at 675 million bushels while the stocks-to-use ratio currently sits at 5.0%, a 15 year low; this will continue to grab investors' attention. Soybean stocks were also unchanged at 140 million bushels, and the stocks-to-use ratio was 4.2%. Wheat ending stocks were increased by 25 million bushels due to a decrease in U.S. exports.

In order to achieve the USDA baseline projection for corn yield in 2011 of over 160 bushels per acre, growing conditions must be perfect. Spring has been wet so far, and any additional rainfall in the Midwest will greatly affect the length of the growing season which will equate to lower U.S. yields and potentially higher grain prices.

Acreage & Stocks
On the 31st, USDA released its Prospective Plantings and Quarterly Grain Stocks reports. The Prospective Plantings report marked 92.2 million acres to be allocated to corn production in the U.S. in 2011. The corn acreage figure came in slightly higher than analyst expectations prior to the report’s release. Corn futures traded limit up after the Quarterly Grain Stocks report revealed corn stocks to be 15% lower as of March 1, year-over-year due to strong ethanol, feed and export demand.

Soybean acreage for 2011 was estimated at 76.6 million acres, 1% lower than in 2010 and well below analyst expectations. Stocks of soybeans were estimated 2% lower year-over-year, at 1.25 billion bushels, due to increased exports and residual use.

The March USDA reports estimated wheat acres for 2011 at 58 million, about 1 million acres higher than market expectations. The outlook on wheat prices is not as bright as corn and soybeans, as wheat stocks were estimated 5% higher year-over-year at 1.42 billion bushels. The export ban which is still being imposed in Russia could still support these elevated wheat prices through summer.

Farmland prices continue to remain above growth neutral for the 14th consecutive month, according to the Rural Mainstreet Index, but March’s reading declined slightly to 75.0 from its recent high of 75.9. Bankers continue to note strong sales in their region, but some are concerned rising fuel prices could pressure farm income.

Recent sales of farmland have proven the strength of the current rally in farmland values. Good quality Iowa farmland has increased 19.7% since September, 2010, according to the Iowa Farm and Land Chapter No. 2 of the Realtors Land Institute. We expect farmland values to continue their appreciation moving forward.

The March USDA reports saved the grain markets during a very volatile month for the markets. It is hard to see more upside in the grain markets, especially at these high prices, but demand is still the driving force behind these prices. A lot can go wrong during the growing season, and at the very tight stocks we currently have on grains, prices still have upside potential.

Both the short-term and lasting effects from the Japanese quake will undoubtedly play into the grain markets. As each news story breaks about the condition of a feed mill or livestock operation, expect grain prices to react. We expect grain demand to stay strong throughout 2011. If Japan’s demand for grain decreases, other importers of U.S. grain will fill any voids, as the case mid-month.

Grain markets will slowly shift their attention to the upcoming weekly USDA planting progress reports that track crop planting progress, conditions, and growth stages. Weather will also play an extremely large role in the grain markets through the rest of the year.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.