| May 15, 2008 | Archived Issues |
Information for Pricing Decisions?
The USDA provided their first monthly estimates of 2008-09 crop supply/demand on May 9. These projections suggested continued tight supplies of corn and soybeans.
Corn production estimates were based on the 86.0 million planted acres from the March 31 Prospective Plantings report, which reflected farmers' early March planting intentions. These plantings would be down eight percent or 7.6 million acres from last year's 93.6 million acres. At that time, many analysts believed that higher corn prices, following the Prospective Plantings report, would encourage increased corn acreage. However, planting delays now leave many wondering if even the 86.0 million acres will get planted to corn. While market attention has focused on the lower acreage in 2008 compared with 2007, 86.0 million acres would be the second largest corn planted acreage in more than forty years!
The planting delays caused the USDA to use an expected yield of 153.9 bpa, which is one bpa below the trendline yields used in many other earlier projections. This results in total estimated 2008 corn production of 12.125 billion bushels, assuming a harvested acreage of 78.8 million acres. Old crop (2007-08) estimated carryover was adjusted upward to 1.383 billion bushels, due to a 100 million bushels decrease in expected 2007-08 ethanol use. This carryover, when combined with the expected production and a small amount of imports, results in a total supply for 2008-09 of 13.523 billion bushels. Will this be enough? Just barely, according to the USDA's projected use numbers.
Corn use is expected to exceed production! Ethanol use is projected to increase by about one billion bushels in the coming year. But feed and residual use is expected to decline as livestock producers adjust to high feed cost and increased distillers grains offset some corn feed use. Exports are also expected to decline as increased world wheat and other feedgrain production offsets some of the foreign demand for US corn. In spite of the decreased feed and export use, corn use is expected to total 12.760 billion bushels. This will draw down carryover supplies and 2008-09 ending corn stocks are expected to be only 763 million bushels. Tight supplies usually mean higher prices and the USDA's forecast is for 2008-09 corn prices to range from $5.00 to $6.00 per bushel.
Is it time to add to corn sales? This market is filled with uncertainty. The USDA's estimates are just that — estimates! Will acreage be higher or lower? How much impact will the later planting have on yields and production? There is no room in these estimates for a summer drought or an early frost that might reduce production. What about demand? Will feed use decline that much? Energy prices, foreign crop production, the value of the dollar, economic conditions or any of a number of other factors could result in more or less corn use.
Although there is considerable risk, profits depend on making profitable sales decisions. Consider the following to help decide whether to add to corn sales.
- New crop December 2008 corn futures prices are near the record highs set following the reports. It is seldom a mistake to make sales near contract or record highs.
- Many Missouri new crop corn bids are in the upper one-half or near the top of the USDA's forecasted price range if the elevators are offering cash contracts. Although higher prices are certainly possible, cash prices in the upper one-half of the forecast price range usually represent pricing opportunities.
- Is upside potential limited? This is difficult to answer, even though prices are near record highs, but the trend is up and tight supplies suggest that upside potential does exist. However, in spite of the price positive supply/demand estimates and, after setting new highs, corn prices have slipped somewhat and it is possible that most of the potential bullish news is already factored into prices.
- When prices are near record highs, there is considerable downside price risk.
- The seasonal trend is for lower prices. Historically, unless serious production problems develop, new crop corn prices offered in May are usually higher than the prices offered at harvest time.
- These prices generate favorable returns.
Although soybean acreage and production is expected to increase, supplies will remain tight. The USDA used the March 31 intended soybean planting acreage of 74.8 million acres, which is up 18 percent or 11.2 million acres from last year. Assuming harvested acreage of 73.8 million acres and trendline yields of 42.1 bpa, 2008 soybean production should total 3.105 billion bushels. This is up significantly from last year's production of 2.585 billion bushels. However, last year's (2007) production was supplemented by record beginning stocks of 574 million bushels. Strong soybean use is using up the 2007 production of corn and depleting carryover supplies, which are now projected to be only 145 million bushels.
Soybean use for 2008-09 is expected to remain strong, totaling 3.073 billion bushels. This is almost as much as is expected to be produced and ending stocks are projected to increase only to 185 million bushels. This will likely support 2008-09 soybean prices, which the USDA forecasts to range from $10.50 to $12.00 per bushel.
How are soybean sales decisions influenced by current supply/demand estimates? As corn planting delays have occurred, there is less concern that planned soybean acres will be shifted back to corn production. While delays in planting soybeans may become a production concern, at this time it is much less of a worry than for corn. However, serious summer dryness or an early frost would also impact soybean production, similar to corn. A large number of factors (energy prices, dollar value, economic conditions, etc.) could also cause soybean demand to move up or down.
While there is considerable risk, consider some of the following in deciding whether to add to soybean sales.
- Soybean futures pries are more than one dollar off of their record highs posted in early March. But current prices have retraced more than two dollars of the decline from those highs and are at historically high price levels.
- Missouri new crop soybean bids, where available, are generally in the upper half of the USDA's forecast price range.
- Higher prices may be possible. The USDA's supply/demand estimates resulted in tighter 2008-09 ending stocks than many expected.
- At these prices, although higher prices could occur, , significant downside risk exists, especially if corn planting delays result in more soybean acres or if use is less than expected. South American competition could also pressure prices upward.
- The seasonal trend is down. Harvest time soybean prices are typically lower than those offered in May.
- Current prices offer favorable returns.
Adding to sales is not an easy decision. Considerable production and price uncertainty exists. The decision is also complicated by the unavailability of cash contracts at some locations. This means some sales may require the use of options that are expensive, or futures contracts that carry the risk of significant margin requirements. The decision may also depend upon how many new crop sales have already been made. However, the USDA's projections provide a look at new crop fundamentals and should be considered as a part of the marketing planning process for capturing new crop pricing opportunities.