Published: June 19, 2008 10:07 am            

Grain Outlook: Flooding means soaring prices

Originally published in the June 20, 2008, print edition.

The following market analysis is for the week ending June 13.

SOYBEANS — Anytime you turned on the television this week, local and national coverage of flooding around the United States was splashed across the screen. This set the stage for soaring prices throughout the week.

We saw bean contracts trade up the 70-cent limit at mid-week. When this occurs, daily trading limits are expanded by 50 percent for the next trading session. If futures lock limit for a second day, trading limits are expanded by another 50 percent. Limits may be expanded twice in a row.

When limits are not locked, trading limits revert toward the original limit in a stair-step fashion.

Questions over how many acres may not get planted and what effect later planting will have on yields may remain unanswered for quite some time. November beans set a new contract high as we headed into the weekend at $15.40 and closing up 91 1/2 cents for the week. The July bean contract did not surpass the old crop high of $15.96, but did close $1.02 1/2 higher for the week.

The weather considerations overrode the sharp rally in the U.S. dollar this week. The U.S. dollar index reached levels we have not seen since late February as the sentiment that the Federal Reserve will increase interest rates rose. If interest rates are upped to curb inflation (retail sales were up 1 percent, more than double trade expectations on this week’s report), holding commodities as a hedge against inflation becomes less desirable.

Flooding in Iowa is disrupting logistics, reportedly causing one meal producer to declare force majeure on shipments. Barge traffic on the Mississippi River may be closed for two to three weeks in some areas.

There’s not much new to report from Argentina, growers are not selling anything and the trucks are now on strike. Brazil is the market for anyone looking to make new soybean purchases.

U.S. exports this week were 10 million bushels for soybeans, bringing total commitments to 100 percent of the U.S. Department of Agriculture forecast. Whether everything gets shipped will depend on what happens in South America. Sales for next year were 1.1 million bushels with 2008-09 sales at just under 95 million bushels versus the 1.05 billion projection.

OUTLOOK: Weather is king. We have yet to take out the contract high in July soybeans, but we’re certainly close. Until we see some kind of significant change in either crop perception or the outside markets, any setback will probably be slower than the rally.

CORN — Even after last week’s tremendous gains, corn rocketed higher this week as rain again hit the Midwest. Flooding has washed out acres and prevented other acres from getting planted even the first time.

The extent of this situation has yet to be fully assessed, but acres and yields have been compromised in a year when we needed ideal conditions. Trade ideas on lost acres range from 1 million to 2 million acres.

Corn set a new one day volume record this week exceeding 500,000 contracts. July corn hit a new high at $7.37 1/2, up 81 cents for the week; December corn set a new contract high at $7.69 and closed up 87 1/4 cents on the week. The all-time high in corn was set in the July 2009 contract at $7.84 1/2.

This week’s monthly USDA report lent support to the corn market overall by dropping 2008-09 ending stocks by 90 million bushels to 673 million bushels. The corn yield was cut 5 bushels per acre to 148.9 bushels per acre, resulting in a production drop of 390 million bushels.

The food, seed and industrial category was lowered 150 million bushels, exports decreased 100 million, and the carry-in from 2007-08 was raised by 50 million by lowering exports a like amount. The average U.S. farm price estimate for 2008-09 rose 30 cents to $5.30 to $6.30.

The Commodity Futures Trade Commission is set to have a few meetings yet this month to discuss the index fund futures market participation and closing the “London loophole” which would allow more CFTC oversight of trading of U.S. commodities on foreign commodity exchanges.

Ethanol margins continue to be under water as the price of corn surges higher and the price of ethanol can’t keep up. Ethanol imports into the United States in April jumped to 49.38 million gallons. Brazil re-entered the market, accounting for 19.6 million gallons of U.S. imports.

A report that a few small to mid-sized ethanol plants were closing due to high corn prices didn’t even pause the market.

Corn exports this week came in at 20.6 million bushels to bring this year’s commitments to 2.327 billion bushels. The latest USDA export projection is 2.45 billion bushels, putting commitments at 95 percent of the forecast. Sales for next year were 2.1 million for a total of 127.6 million bushels versus the USDA estimate for 2 billion bushels.

OUTLOOK: At this writing at least, the weather pattern is looking drier for the last half of June, but the uncertainty over what has already been lost should keep a floor under the market. That is, unless the CFTC makes some changes to how index funds participate in the commodity markets, the government moves quickly to suspend ethanol blender’s credits, or ethanol production crashes.

It’s futile to try and predict what price is high enough to ration corn. For most it’s a question of how to protect what you don’t have sold when we hit that rationing level.

Nystrom’s notes: The June acreage report will be released June 30. A pilot program beginning June 16 will be implemented where the front five Chicago wheat contracts will be settled versus the electronic close.

        

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