Despite adverse environmental conditions, U.S. farmers managed to produce a record breaking 13.15 billion bushel corn crop in 2009.
But questions linger about grain quality, continuing struggles to harvest the crop and the prospects for increased price volatility due to rising stocks.
“There’s plenty of corn,” said Brian Basting, an analyst with Advance Trading, speaking at a CME Group press briefing on USDA’s Jan. 12 Crop Production Report and World Agricultural Supply and Demand Estimates. “We’re not running out of corn, and one could build a case that the carryout could continue to rise because exports continue to struggle.
“As we get into February and March, we’ll see the corn exports pick up. But we think the hole is just too deep to dig out of, and that export number could decline a bit. We’re continuing to see the livestock producer struggle for profitability. The feed number is probably a bit inflated and could come down later.”
Basting added that test weight and quality issues in this year’s corn crop could increase corn use for ethanol. “Prospects are brighter with the margins improving substantially, and with the quality of the corn down, we may need to grind a bit more.”
According to Jerry Gidel, an analyst with North American Risk Management Services, the downside risk in corn over the next two months “could be $3.80. We’re going to have volatility in this market big time. The world is definitely understanding the needs of agriculture on a worldwide basis, and we do have a new asset class of investors in the agricultural markets, and they look at things a little longer-term than we do.”
Basting noted that a big surprise has been the excellent performance of corn hybrids under adverse conditions, along with cool temperatures during pollination. “Each year, it comes down to what happens during pollination.”
USDA tightened soybean carryover in the January report, but not to the point of bullishness. Basting added that soybean fundamentals “can change like night and day on the size of the current South American crop. We have a record export program going, and the carryout did decline 10 million bushels. But USDA increased the Brazilian soybean crop by 2 million tons to 65 million tons. Added to 53 million tons in Argentina, that’s 115 million tons coming in 60 days to 90 days. We’re looking at a wall of beans coming.”
Gidel believes U.S. exports will eventually fall off sharply, “and if the market gets comfortable with the confirmation of the South American crop in the coming weeks, soybean prices could come under some pressure because we will lose that entire export program as we move in March, April and May.”
Given the wet weather and delayed harvests this fall over many parts of the United States, it’s no surprise that USDA reduced wheat plantings in its January Winter Wheat Seedings report. But the amount was surprising, Gidel noted. “We had a substantial decline in wheat seeding versus expectations of over 6 million acres. I can’t remember any wheat seeding dropping 6 million acres in one year.
“We just did not get the wheat planted because it was too wet. And we didn’t get as much hard red winter wheat planted out West either.”
The bullish news is largely offset by a 200 million ton carryout in global wheat, noted Gidel. “Three years ago, when we had the runup to all time highs, we had 120 million tons of world stocks.”
Basting believes there could be an increase in both U.S. corn and soybean acres this spring. “It really underscores the notion for farmers to be very attuned to getting their 2010 marketing plan in place. There could be considerable downsides for 2010 prices.”
Basting sees volatility ahead “both to the downside and the upside. Domestically we’re not running out of crops. You need to start being aggressive on 2010 pricing. Leave your upside open if you’re a producer and your downside open if you an end user.”
This is an important time for risk management, noted Gidel. “There is potential for an upside past $4.50 in corn and $10.50 in soybeans.”