This year's U.S. corn and soybean crops look like winners on all counts except price direction, according to market analyst Roger Knapp, speaking at the Ag Market Network's October teleconference.
Knapp, with STA Trading Services, says corn production in 2004 won all four indicators of yield in the Midwest — early planting, rainfall and temperature in July, rainfall and temperature in August and temperature in September.
In fact, “This corn crop had certainly the most favorable growing conditions in the last 20 years, and maybe the best in the last 50 years.”
However, one not-so-bright result of the large crop is the forecast for a record high for corn ending stocks — 1.7 billion bushels. And it's not over yet. “We have one more major crop estimate to go in November, and we could see that number go up another 200 million bushels.”
Even if next year's corn acreage is the same as this year's and trend yields return to a more normal level, “we still have a major supply in front of us, and we don't have any options on how we're going to reduce it in the short term.”
Knapp says the function of the corn market is to keep prices low enough, long enough to find some increased usage. “However, USDA lowered the export number in October's report by 25 million bushels due to large supplies of feed wheat around the world — in the EU, eastern Europe, Canada and Minnesota.”
One potential for upside is if China reevaluates its currency upward, in compliance with the request of the U.S. government. “We could see China not be able to export corn without very expensive subsidies, which could knock China out of the corn export market.”
Another bright side is the U.S. ethanol market, which has been the growth sector of corn usage the last four years. “USDA has penciled in more than 1.3 billion bushels. But all ethanol plants are running at full capacity. It's going to be difficult to take the ethanol number up in the short-term.”
USDA is projecting a 200-million bushel increase in domestic feeding this coming year. “Undoubtedly, we're going to see about a 4 percent expansion in poultry numbers, but most of those operations are already operating close to full capacity.
“If we do produce more meat, the obvious question is what do we do with it? Americans are already consuming very high protein diets and there is a question on how much more protein can be worked in.”
Another summer drought is needed to eliminate the projected surplus in corn, noted Knapp. “We're looking at an environment comparable to what we had three to four years ago, when we had large stocks of corn. Unfortunately, it's going to take a couple of years to work this down.
“For the short-term, I don't see a lot of upside. Keep in mind that we could see the production estimate increase in the November report.”
As to the argument that corn prices will have to go higher in the spring to attract acreage, Knapp pointed out that if soybean prices take a dive as expected, “then corn doesn't have to compete with higher soybean prices for land.”
There could be blips in the market after harvest, “as we get some short covering by the funds,” Knapp said. “But any corn rally will be met with a wave of selling. USDA has already processed over 500 million bushels of LDP payments, so the farmer is sitting there with corn that he owns and he's taken the LDP. Any upward bounce in the corn market from this point forward creates an opportunity for him to make a few cents over and above the loan.”
The function of the soybean market is to drive soybean prices low enough to discourage acreage expansion in South America, according to Knapp. Planting is now under way in the region.
This assessment comes on the heels of a U.S. soybean crop estimated to be 27 percent larger than last year and a forecast carryout of 400 million bushels. “But that's just the tip of the iceberg,” Knapp said. “The reality of the soybean market is that world production was raised by 6 million tons, while usage was lowered by 1.3 million tons.
“We're looking for world stocks-to-use ratios to be almost one-third of our total usage. It clearly says that the world has too many soybeans.”
To discourage soybean expansion — primarily in South America — the market has to take prices to the low $4 area, which is close to cost of production in South America.
Knapp pointed out that costs have risen in South America recently because of its heavy reliance on high transportation costs. In addition, “fuel prices are at a record high in the world.”
A wild card is the potential for a reoccurrence of Asian rust in Brazil. “Last year, USDA estimated that yields were substantially below trend in Brazil. A portion of that reduction was due to drier-than-normal weather, but a portion was also due to Asian rust. We could get some mid-winter blip if we lose some of the Brazilian crop.
“The best opportunities for U.S. corn and soybean producers at this point is to maximize their returns through the loan deficiency program,” Knapp said. “Look for some basis appreciation on both corn and soybeans after the harvest is complete and see what happens next year.”