Varied ideas about soybean, corn and wheat prices, with key in weather

by Ron Sterk
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KANSAS CITY — Armed with the most recent grain planting intentions and stocks data, analysts offered mixed forecasts for soybean, corn and wheat prices for the next six months. At the same time, there was consensus that outside factors would continue to be major market-moving influences but increasingly would play second fiddle to spring weather.

"Soybeans got a shot of adrenaline, corn is already trading weather, and wheat will continue to follow other markets," Steve Freed, vice-president, ADM Investor Services, Chicago, said after release of the March 31 U.S. Department of Agriculture Prospective Plantings and Grain Stocks reports. "But weather is key, even in a recession."

Extremes in weather have been the rule in late winter and early spring, with dry conditions in much of the hard red winter wheat region, drought turning to excessive moisture in parts of the Delta and Southeast, excessive moisture and cold across the Corn Belt and massive flooding along the Red River and its tributaries in the Upper Midwest’s spring wheat/durum region.

The Prospective Plantings report updated the U.S.D.A.’s January winter wheat seeding estimates and provided the first survey-based input about farmers’ 2009 spring planting intentions (see story on Page 18). The new data also fine-tuned trend-based projections issued at the annual Agricultural Outlook Forum in late February.

The U.S.D.A.’s Grain Stocks report, also released last week, yielded supply data as of March 1 and showed significant increases in farmer-held stocks of wheat, up 205% from a year ago, soybeans, up 11%, and corn, up 8%. March 1 stocks in all positions were up 46% for wheat and 1% for corn, while soybeanstocks were 9% lower than in 2008.

Soybean area surprises trade

The greatest "surprise" in the March 31 government reports was intended soybean area, estimated at 76 million acres for 2009. Although the area would be record large if realized, it was up less than one-half per cent from 75.7 million planted acres in 2008 and was 4% below average trade expectations.

"Soybeans went from the ugly stepsister to the beautiful princess over night," Mr. Freed said, suggesting the reports added $1.50-a-bu upside potential to soybean prices with $10.50-a-bu November futures possible.

"It’s a shock farmers are not going to plant more soybean acres," Mr. Freed said. "We have a soybean rally in a soybean meal and soybean oil bear market, but we’ve got to keep the premium until we know we have enough soybeans to satisfy demand."

Old crop soybean prices will be "spicy," said Dan Basse, president, AgResource Co., Chicago. He suggested July soybean futures prices, which closed at $9.02 a bu on March 30 and soared as much as 52c a bu after the reports, could climb to $10.50@11 a bu before fall harvest, in part due to a smaller crop in South America.

Argentina’s Agriculture Secretariat said last week that nation’s drought-reduced soybean crop would be 37 million to 39 million tonnes, well below the latest U.S.D.A. projection of 43 million tonnes. Analysts suggested the crop most likely would fall somewhere between those numbers, but they also noted Argentina, the world’s third-largest soybean producer (after the United States and Brazil) and the largest soybean meal and soybean oil exporter, has become an unreliable supplier because of almost annual export tax problems.

U.S. soybean prices have been supported in recent weeks partly by restricted exports due to a dispute between Argentine farmers and their government over high export taxes. By this time of year, China, the world’s largest soybean importer, usually has shifted its interest from the U.S. market, where soybean supplies are shrinking five to six months after the 2008 harvest, to South America, where ample supplies of newly harvested soybeans are coming to market.

Paul Meyer, vice-president of commodity analysis, Connell Purchasing Services, Berkeley Heights, N.J., had lower expectations for soybean prices. While he agreed the 76-million-acre planting number was a "big surprise," Mr. Meyer suggested soybeans were not as bullish as they might appear. He noted the backlogged Argentine soybean supply still would come to market, in addition to new harvest sales from Brazil. This would reduce foreign demand for U.S. supply and potentially depress prices. Further, a "normal" U.S. soybean yield of 42 bus an acre with record-large area may result in production 150 million bus over demand, resulting in a "pretty big buildup in carryover" on Sept. 1, 2010, to 300 million to 350 million bus.

In its March World Agricultural Supply and Demand Estimates (WASDE), the U.S.D.A. projected the carryover of U.S. soybeans on Sept. 1, 2009, the beginning of the 2009-10 marketing year, at 185 million bus, down 10% from a year earlier and down 68% from two years earlier. Domestic soybean use in 2008-09 was projected at 1,640 million bus, down 9% from a year earlier, with exports at 1,185 million bus, up 2%. After the first 30 weeks of the marketing year (March 26), export sales commitments actually were up 7% from a year ago, the U.S.D.A. said.

Reduced livestock numbers would "drag" on demand for soybean meal, the primary source of protein in livestock and poultry rations, Mr. Meyer said.

And a nearly 50% reduction in expected biodiesel production from a few months ago would reduce soybean oil demand, Mr. Meyer said. He noted "extremely low" soybean oil basis levels at 350 to 400 points below nearby soybean oil futures prices. He predicted soybean oil prices may slip to 28c a lb with the approach of the fall harvest, compared with about 32c for nearby futures prior to last Tuesday’s reports. Nearby soybean oil futures prices surged more than 1½c a lb after the March 31 reports.

"Long term it’s hard to get real bullish on soybeans," Mr. Meyer said, suggesting prices may slip to $7.50 a bu or below with harvest pressure in the fall. He suggested that $9 soybeans in March 2010 may encourage still larger soybean area next year.

Crop sizes typically "increase" from March intentions to final October estimates, Mr. Freed said. U.S.D.A. data indicated corn plantings increased from March to October in six out of the last 10 years for corn while changes for soybeans were about even.

Spring weather is key for corn

Unlike soybeans, indicated corn area slipped from a year ago, but the decline was less than expected. Intended area for corn was estimated by the U.S.D.A. at 84.986 million acres, down 1% from 85.982 million acres in 2008 but slightly above average trade expectations of 84.5 million acres. If realized, it would be the third-largest crop since 1949, although acreage has declined for the second consecutive year.

As often was the case historically, corn was expected to command top billing among the "big three" commodities. While the U.S.D.A. planting and stocks numbers were about as the trade expected, weather will be especially critical for corn, which needs to be planted before soybeans because of its longer growing season. Nearby corn futures prices surged about 20c a bu the day of the reports, closing above $4 a bu for the first time since Jan. 9. Price strength derived mostly from surging soybean values and outside influences, with prices giving back about half of those gains April 1.

Corn planting likely will be delayed, but it’s "too early to pull the panic trigger," said meteorologist David Salmon, president of Weather Derivatives, Kansas City. "It’s wet, but it’s also the first of April. Corn planting is not going to be later than last year."

Mr. Salmon expects generally "normal" spring weather across most of the country, which ultimately will be favorable for spring planting. The first half of April will be slightly to moderately wet and cold across the Corn Belt, he predicted, but the second half will be drier. Because the soil is wet, even saturated in places, much of the additional moisture will run off, he said. Delayed planting typically favors soybeans, which require a shorter growing season than corn.

Mr. Meyer had a mostly bearish outlook for corn prices, predicting values may fall $1 a bu, to the $3.25 a bu area near harvest in the fall. Large carryover stocks, resulting from a large 2009 corn crop and an estimated 17% first-quarter reduction in feed use of corn because of lower livestock and poultry numbers would ultimately pressure prices, he said.

The U.S.D.A. projected the carryover of corn on Sept. 1, 2009, at 1,740 million bus, up 7% from the previous year and up a whopping 33% from 2007. The U.S.D.A. projected an 11% decline from a year ago in 2008-09 feed and residual use of corn and a 6% decrease in exports. Year-to-date export sales commitments through March 26 were 38% behind the same period a year earlier.

"Nothing is really negative until we get corn planted," Mr. Freed said. Farmers in Illinois, the nation’s second-largest corn producing state behind Iowa, like to have corn planted by April 10, he said. "Corn is not going to be planted by April 10 this year." He noted recent price rallies in corn futures prompted selling by farmers, which then pressured prices, but he added most users had little if any coverage in corn because "they all thought it was going to $2.70 a bu."

Mr. Basse said he also expects that ample corn supplies and demand deterioration will pressure prices from current levels, with December futures dropping to around $4 a bu. But weather problems may push the price into the $4.50@4.70 range, he added. He also suggested a potential boost in corn demand for the production of ethanol as seven shuttered plants purchased by Velaro Energy Corp. from bankrupt VeraSun Energy Corp. reopen.

Wheat will remain a follower

Weather also may affect planting of spring wheat and durum, as well as other crops, in the Upper Midwest. The Red River crested at record or near record levels at Fargo, N.D., just a little more than a week ago. While more rain and snow has since fallen in the area, there should be no additional flood events, Mr. Salmon said. April will bring a "slow thaw" because of below normal temperatures in the region, he said, which would tend to delay planting.

Spring wheat acreage might drop more than the 6% already indicated in the Plantings report, the analysts said, but an increase in hard red winter wheat area has largely offset the decline.

The U.S. all-wheat carryover on June 1, 2009, the beginning of the 2009-10 marketing year, was projected by the U.S.D.A. at 712 million bus in the March WASDE report, up 133% from 2008 and up 56% from 2007. Exports for 2008-09 were projected at 980 million bus, down 22% from a year earlier.

In addition to a growing U.S. supply, world wheat stocks were plentiful, rebounding quickly from historically low levels last year. The International Grains Council in March projected 2008-09 global wheat ending stocks at 160 million tonnes, up 39% from the previous year, largely as a result of record-large world wheat production for the current year.

Mr. Meyer cited an Egyptian tender last week in which U.S. wheat prices were $20 a tonne (or 50@60c a bu) higher than Russian wheat, which was selected by Egypt.

"U.S. wheat is not competitive," he said, adding, "I don’t expect export business to pick up." He noted several countries "still have pretty good-sized stocks they need to export."

"We still have big stocks of wheat," Mr. Meyer said, predicting nearby wheat prices have 50@75c a bu downside potential going into summer on all three futures exchanges. He noted some weather risk premium remained and prices "can’t get too far out of line with corn and soybeans" because spring wheat still must compete for acreage with the other crops.

"Just looking at supply/demand, wheat prices should move lower into harvest," Mr. Freed said, adding that "demand stinks." He said Kansas City December futures may fall to $5.75 a bu through the end of the year unless "weather doesn’t cooperate." He noted the market hasn’t been trading demand, which has contributed to making U.S. wheat prices uncompetitive on the world market.

Mr. Basse called wheat "the tail of the dog" as it follows other markets. Kansas City May wheat futures prices may slip to $5 a bu, July futures to $5.10 and December futures to around $6, he suggested, again citing the "heightened importance of weather."

Weather in the hard red winter region has been of special concern so far this season, with much-needed moisture finally arriving during the past couple of weeks. Still, much of the area remained drier than desired, especially in Texas and Oklahoma, where poor to very poor condition ratings were 63% and 46%, respectively, as of March 29.

"Western Kansas, eastern Colorado and the panhandles of Texas and Oklahoma are still dry," Mr. Salmon said, while moisture in the northern hard red winter states was "looking pretty good."

"Hard red winter wheat still needs moisture," Mr. Meyer said. "We still have a way to go with less than ideal conditions."

The analysts also noted fewer total acres (all crops reported by the U.S.D.A. combined) were expected to be planted in 2009 than in 2008.

"It’s bothersome farmers decided to plant 5 million less acres because of poor returns and profits," Mr. Freed said. "When the economy turns around, there may not be enough supply." Total wheat area was expected to be down 4.5 million acres from 2008.

In addition to weather, outside markets were expected to have an ongoing impact on soybean, corn and wheat prices.

The global economic recession will continue to play a major role in dictating commodity values, analysts said. Although they noted the influence has been greater for corn and soybean meal demand, because of reduced livestock and poultry numbers, than for wheat demand. They also suggested demand of all commodities could take a sudden surge once the economy bottoms and begins to improve.

"Wheat futures have followed the Dow Jones Industrial Average," Mr. Freed said, suggesting the impact of outside markets on commodity futures prices.

At the same time, Mr. Freed noted the reemergence of buying by commodity funds may have a strong upward price bias. Commodity futures open interest is about half of what it was when fund involvement peaked, he said.

"Funds still have a lot of ammunition to buy," he said. "If they want to step in, we can’t stop it."

Crude oil, another key influence on agricultural commodities because of its impact on the use of corn to make ethanol and on the use of soybean oil to produce biodiesel, appeared to be less influential than the general economy ever since crude oil prices plummeted from record highs last year and have been more stable around $50 a barrel.

The last of the "major" outside influences, the value of the U.S. dollar, tended to have a depressing effect on commodity prices since it strengthened from lows a few months ago. A stronger dollar makes U.S. exports more expensive and less competitive against foreign products. This was especially evident in wheat, where even regular U.S. customers have selected wheat from other origins over U.S. supply in many recent tenders.

U.S.D.A. soybean, corn and wheat supply and use projections will be revised in its April 9 WASDE report. The first 2009 U.S.D.A. survey-based winter wheat production estimate will be released in the May 12 Crop Production report.

This article can also be found in the digital edition of Milling and Baking News, April 7, 2009, starting on Page 1. Click here to search that archive.

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