Agriculture Update: Corn, Soybeans and Rice

The past few days have brought out some of the media big hitters in agriculture-land. The first was the USDA's World Agricultural Supply and Demand Estimate followed by the latest Crop Progress Report These two reports (along with the weather report) teamed up to move the ag markets, and are quickly shaping the season to come.

Complex Corn

Since the Prospective Plantings report back at the end of March, the market has priced in an expectation of lower production numbers for the 2008-2009 crop year due to fewer acres going for corn. With Friday's report, the market got some hard predictions as to what those numbers might look like.

The USDA projects that crop production is going to be 7% lower than this year. That number includes a yield which is projected to be 153.9 bushels per acre. That's a bushel down from the trend of the past 17 years due to slower-than-average planting.

Planting sounds nice, doesn't it? Digging in the warm earth, sun on your back, placing seeds gently into the warmth of sweet-smelling earth. Yeah, that's just not happening this year. Or at least, not in those sunny, dry conditions. If you've been following the ag media, you know that the farmers have been dealing with a lot of wet, rainy conditions that are just not conducive to planting. If you plant corn in soil that is too wet, the plants won't send out deep roots (would you push through the dirt for water if it were just sitting there on top?). Deep roots are essential to healthy, high-yielding corn surviving the heat of July and August. Shallow roots = dead plants, or at least low yields.

Corn also needs to be in the ground for a period to establish itself before the heat comes. Less time = lower yields. One estimate says that for every day past May 15 that corn is planted, you get a decrease of 1.5 bushels per acre per day. No wonder farmers are planting every dry moment they can.

The good news (for farmers) is that the weather report suggests those dry moments are going to get more frequent, which has served to at least hold corn futures level, or drop them a dime or two in the out-months. All the corn may not be in the ground by May 15, but there's hope that the vast majority can be in by next week.

That's the supply side of things. On the demand side, projections show total corn use dropping by 2%. Most folks would find that surprising, but it's been the expectation for a while. A reduction in corn going to feedstock and residual uses is going to outweigh the 33% increase of corn going for ethanol use. Yes, even at the high corn prices we've been experiencing, corn for ethanol use is going from 3 billion bushels of corn in crop year 2007-2008 to 4 billion bushels in 2008-2009. Of course, that rate of growth is not expected to continue. The USDA report states that construction on ethanol plants - both new and expansion of existing ones - has slowed, and plant utilization rates have dipped due to maintenance. And of course, corn's not cheap. If the USDA's projections are correct, ethanol plants (and everyone else) will be paying between $5 and $6 per bushel this year. Considering that the current price for the May futures contract is right around $6, this projection may be a bit low.

If you take the production side of things minus the consumption side of things, you end up with a projected decrease in ending stocks of 45%. That would put inventory for 2008-2009at the lowest it has been since 1995-1996.

If all that were a surprise, you'd expect the stock market to react a little wildly. Ending stocks down almost half? You'd think prices would be up.

Corn (C, CBOT) Daily

And they have been - since January. Apparently the market is a pretty smart animal. There is a lot of information out there - wheat in tight supply, soybean prices up, corn plantings down. This ending stock number didn't surprise many people. In fact, looking at the chart, there's hardly a hiccup.

More important than the old news of low stocks has been the continuing wet weather. If this week sees dry weather, those prices will continue to fall. If rain continues, there are some rumors that farmers might switch some of their corn acres to soybeans - they can be planted later than corn. That would throw a giant unknown into planted acreage, and speculators would go nuts.

Keep a weather eye on the horizon.

Oh, and just in case you're interested in how ethanol's price has been affected by the latest projections:

Ethanol (AC, CBOT)

It got a bit of a bump from the news of low corn stocks, but prices have come right back down, very much in line with corn's prices.

Simple Soy

On the other side of the corn seesaw are soybeans. More soybeans are going in the grown, and that's translated into a small, 3% rise in the supply of soybeans. The problem? Soybean supply was very tight when the season started. Remember the call of beans in the teens? The USDA puts projections below that - only $10.50 to $12 per bushel. Of course, the current price is sitting above $13 right now, but there is still a lot of time left in the crop year for that to go down.

Soybean (S, CBOT)

While we're excited about the increased prominence of biodiesel in recent media coverage on biofuels, the use of soybean oil here at home is projected to rise only a little because the increased use of soybean oil in biodiesel is nowhere near enough to offset projected decreases in soybean oil for food use. As far as biodiesel is concerned, 15% of soybean oil production is projected to end up as biodiesel in 2008-2009 - that's compared with 14% for 2007-2008.

Rice Crisis

While some of the mainstream press has made some spurious ethanol/food shortage connections, those following the actual news coming from the Third World know that rice has been at the root of any real food shortages, so let's see what the USDA is projecting.

Domestically, we're planting only 9,000 more acres than were planted in 2007-2008. You'd think that with all of the media attention, more acres would come on line. According to the May 12 Commodity News for Tomorrow from CBOT, the problem is that rice is expensive to grow, and since rice prices had been low since 2000, many farmers had switched to planting corn or soybeans - crops far more interchangeable. Those that were able to hang on are benefiting from the higher prices, but the prices aren't high enough to bring massive acreage back into rice production.

Those 2.77 million acres that are in rice production are projected to have a yield that is lower than 2007-2008, but still the second-highest on record. Even so, the U.S. is looking at beginning stocks in 2008-2009 that are going to be 45% lower than in 2007-2008.

Globally, rice production is projected to reach a new record - 432 million tons, according to the USDA and 441 million tons, according to an FAO report. Either way, this is higher than last year and that's good news for people who, you know, eat. The bad news for those in need is that demand growth and export constraints are going to continue to keep prices high. Consumption is projected to be 428 to 437 million tons (an increase of about 2%, depending on which numbers you use). Countries are expected to continue limiting exports in order to increase stocks available for their own domestic use. Obviously there's an issue in these numbers. If the supply numbers are on the low side and demand is on the high side, there are 5 million tons missing from the math, which means drawing down stocks.

A comparison of the two reports on that front gets even more confusing. The USDA's report states that global ending stocks are actually expected to rise 5% to the highest point since 2002-2003. The FAO's report states that global ending stocks will be slightly below last year at 105.2 million tonnes. High? Low? Either way, both reports are looking for high rice prices to continue at least through most of 2008-2009.

And besides, some of the numbers may be in question because of the recent cyclone that went through Myanmar. Myanmar is not an exporter of rice, but it was fairly self-sufficient. Cyclone Nargis hit during the harvesting of the dry rice crop which accounts for 20% of Myanmar's total rice crop. Most of the crop was probably harvested, but the state of the infrastructure to store it and transport it is very much in question. The main rice crop is supposed to be going in the ground now, and farmers may not have sufficient access to seed, or rice paddies may be inundated with salt water which can make planting impossible or lower yield significantly. Myanmar may need to import what it needs to feed its nearly 50 million people from nearby countries, further straining global supplies.

Rough Rice (RR, CBOT)

Moving On

There's your update. Aside from soybeans, the ags market is facing some pretty significant uncertainty. This is going to be anything but a straightforward year, and while nobody seems to be panicking about the low corn stocks, they're not ebullient about rice production either. In both cases, any surprises in the next few months should have a substantial effect on the futures.

Comments

[daniela]

Weather is not only factor here. Most farmers use GMO corn that has specific traits that withstand wet or dry weather. We are dealing with crops that are more unpredictable than weather. If these GMO seeds develop new resistance to pests/mold we can have "potato famine". I don't think this will happen. Who is really sitting pretty here? Monsanto--supplier of all GMO seeds. Farmers buy these with guarantee of the best crop yields. They are willing to pay higher prices for these. I hope midwest will have enough sun to produce good crop this season. Government would restrict ethanol production (from corn) if we would have real crisis. Europe has high prices for food and gas. We are getting there slowly but surely. America has limited resources too. This is not crisis. Just the fact.