April 11, 2008 03:09 pm
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Editor’s Note: Tim Emslie, Country Hedging market analyst, is sitting in this week for Phyllis Nystrom, the regular “Grain Outlook” columnist.
The following market analysis is for the week ending April 4.
SOYBEANS — The week began with a bearish shock from the U.S. Department of Agriculture’s “Prospective Plantings” report.
The USDA estimates plantings of 74.8 million acres, up a little over 11 million acres from last year. The number actually exceeded the high end of the range of guesses prior to the report. This would bring soybean acreage back to essentially the 2006 level.
This increased acreage caused most private balance sheet projections to show a build in 2008-09 stocks, a significant shift in sentiment. The Delta and other areas south and east of the Corn Belt increased acreage by 26 percent, the western Corn Belt increased acreage by 18 percent and the eastern Belt was up by only 11 percent.
Adding to the bearish bean sentiment was the March 1 stocks number, which showed inventories were 75 million bushels higher than expected. This implies the 2007 crop was understated by as much 100 million bushels, most likely due to understated acreage.
The futures market responded to the double-barreled bearish report with a severe sell-off during the first two days of the week, but the focus shifted later in the week to how much acreage can be shifted back to corn. For the week, nearby beans were up 9 3/4 cents, while new-crop beans were up 64 1/4 cents.
On the demand side, weekly export sales for old crop were 6.8 million bushels. The recent export tax strike in Argentina has caused some additional sales from the United States. The USDA will need to increase exports on the April supply-demand report since we have essentially already met the current projection. Basis continued to firm during the week, at both export and domestic markets.
OUTLOOK: It didn’t take long for the idea to surface that Monday’s acreage number was the highest bean acreage we would see during 2008. With the current projected acres, it’s possible that next year’s carryout could grow to as much as 250 million bushels, which would be roughly 100 million bushels higher than the best guesses for this year’s stocks. While not burdensome — and obviously very preliminary — that does offer a little room to shift acres back to corn this spring.
Based on fundamental analysis of both crop years’ balance sheets, it looks like there should be some price erosion in soybeans, but as shown already this week, if corn continues to rally, beans will have a tough time going down much.
CORN — As bearish as the soybean reports were from the USDA, the corn numbers were just as bullish. Acreage came in at 86 million acres, about 1.4 million less than expected. But even more bullish than the acreage reduction was the March 1 stocks number. Stocks were over 200 million bushels less than expected, implying feed and residual use up over 14 percent from the previous year.
The most likely scenario is that the USDA overstated corn acreage last year, and therefore the crop was not as big as reported. This theory is given further credence by the fact that the soybean situation is the mirror image — stocks inexplicably larger than expected. But regardless of the cause, the fact is that the corn market needs to ration usage at some point in the future.
Old and new-crop futures both hit new highs during the week, with the nearby contract up 37 1/2 cents, and the December contract up 32 cents.
Ethanol prices hit the highest levels since August 2006 this week, and are keeping ethanol grinding margins in the black. Increasing ethanol usage in southeastern markets, and advancing gasoline prices, have spot ethanol margins around 50 cents per bushel.
OUTLOOK: The pressure is now on the corn market to buy back 2 million to 3 million acres from soybeans for 2008. Net revenue returns as estimated by Informa Economics moved decidedly in favor of corn this week, and now favor corn by more than $250 per acre. However, there are two factors that could hamper a shift back to corn.
First is the fact that many elevators, especially in the east, are not offering new-crop bids, making it more difficult for farmers to take advantage of recent rallies. The second issue is the wet weather that seems to continue to want to hang around, preventing an early start that is historically critical to shifting acreage after the March intentions report.
With new highs on the chart, and balance sheets not seeing any relief, look for new highs in corn.
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Tim Emslie