Grain markets have been in a rally mode since harvest began last fall, as the updraft in the corn market continues to push soybean and wheat prices to higher levels.
Last fall's rally started when traders began to realize that the corn crop would be about 11 percent less than projected demand — the largest shortfall since 1988, say George Shumaker and Nathan Smith in their 2007 Grain and Soybean Market Situation and Outlook.
The University of Georgia agricultural economists note that corn prices have soared to more than $4 per bushel, the highest level since 1996. They add that speculative trading also has contributed to the price rally as large-fund traders have invested in commodity futures partly due to recent enthusiasm for biofuels.
Soybean and wheat markets have continued to move higher, say Shumaker and Smith, as these two commodities try to remain competitive in the race for 2007 crop acreage despite much easier supply/demand balance sheets.
“In addition to the crop shortfall, demand for corn has soared in recent years due to a larger U.S. livestock herd, strong export demand, and, more importantly, the dramatic increase in ethanol production,” state the economists.
Corn used for ethanol production has grown from about 600 million bushels in 2000 to about 2.14 billion bushels for 2006. It's expected to grow by another 535 million bushels during the first three quarters of 2007. According to the Renewable Fuels Association, there are plans to build additional ethanol plants that could use as much as 2.4 billion bushels by the end of 2008.
Faster growth expected
“In total, corn demand has averaged a 5.2-percent annual growth rate since 2002 but will grow even faster in the next couple of years if all of the additional plants are built,” says Shumaker and Smith. “We can call the corn market rally a demand-driven rally more so than a supply shortfall rally. Whatever we call it, the combination of these two factors is what has given us $4 corn now with likely strong corn prices into the future.”
High corn prices, however, are having a negative impact on the U.S. livestock industry, they say. Poultry production is expected to decline by about 5 percent during 2007 and hog producers likely will slow production as well.
“The cattle industry, by its longer production horizon, cannot respond as rapidly but almost surely will see a slowdown in heifers retained and increased cow slaughter. That means more beef on the market now and lower near-term prices,” say the economists.
Corn production, they say, will expand considerably during 2007 and may hold onto acreage gains for some time to come. “The 2007 corn plantings will need to be near 89 million acres or about 10.5 million more than 2006 to meet growing demand. The acres will have to shift from other crops, with soybeans and wheat being the most likely candidates. Soybean plantings could drop by six million acres from 2006 and soft red wheat acres by about two million acres, leaving the rest from other crops, including cotton and peanuts.”
Fundamentals in the soybean market are considerably different from the corn market, says Shumaker and Smith. U.S. growers produced the largest crop on record in 2006 at 3.19 billion bushels, up 4 percent over 2005.
“Demand remains strong for soybean meal to feed livestock, but it will tail off during 2007 due to herd reductions. Soy oil demand has been weak in both the food processing sectors and for biodiesel production. Soybean exports are projected to be strong to date but likely will weaken as the South American harvest begins in late March.”
In total, say the economists, soybean use will be record large but soybean ending stocks also will be at record levels. “The level of ending stocks relative to total use is at the highest level since 1986 when prices were below $5 per bushel. This factor will limit upside potential in soybean prices once the planters begin to roll this spring. In the meantime, soybean prices are likely to be propped up by the competition for acreage from corn.”
The wheat market, they say, remains a “dysfunctional problem child,” especially for Southeastern soft red wheat producers. “Local cash prices do not seem to reflect historical basis relationships to futures prices, and the loss of grain handling and storage capacity has limited marketing alternatives. Local basis levels are historically wide, signaling a weak market for wheat. Growers with long-term relationships with end users still can sell wheat at near futures market price levels, but new producers may be scrambling to find handlers and acceptable price alternatives in 2007.”
Harvest acrege unknown
While Georgia-seeded wheat acreage has increased for the 2007 crop year, it remains to be seen how much of that acreage will be carried to harvest, say Shumaker and Smith.
“The strong rally in corn prices has some growers pondering whether to continue with the wheat crop or to plow it under and plant corn. Given our strong cash corn markets and weak cash wheat markets, this is a good alternative to consider, especially for the savvy corn marketer.”
Just as with the soybean market, they say, the wheat market has been riding along with corn. “The fundamentals of these markets are different. And wheat, particularly soft red winter wheat, has limited upside potential.”