Market Preview: Not A "Good News" Week

US - Weekly U.S. Market Preview w/e 10th November, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 11 November 2006
clock icon 6 minute read

USDA's monthly Crop Production and World Agriculture Supply and Demand (WASDE) reports released this week indicate that the big crop is getting SMALLER. That goes against the age-old adage, but it seems to accurately reflect yields from various parts of the country, which have, in general, been a little lower than many farmers had expected.

The latest estimate of the 2006 corn crop is 10.745 billion bushels -- not far from the pre-report estimates (see Figure 1). Planted and harvested acres remain the same as last month, but USDA lowered its estimated national yield average from 153.5 to 151.2 bu./acre. The adjustment was mainly due to lower yields in Illinois, Indiana, Iowa and Nebraska -- a veritable "Murderer's Row" when it comes to corn production.

The 160 million-bushel reduction in the estimated crop was balanced by cuts of 50 million bushels for both feed usage and exports and a 60 million-bushel reduction in 2007 carryout stocks. Those stocks, at 935 million bushels, represent just 7.9% of total 2006-07 usage. That stocks-to-use percentage is very low and the driving force for USDA to increase its estimated price received by farmers by 40 cents/bu. -- from $2.80 to $3.20.

Chicago Board of Trade (CBOT) corn futures traded higher early in today's session (Nov. 9), but closed lower with December 2006 through September 2007 losing 7 to 8.5 cents/bu. and December 2007 losing 11 cents.

Recall that wheat was a major trigger for this fall's corn price increase. USDA did not change any number in its U.S. wheat forecast from October, but increased world wheat supplies by 2 million metric tons. This year's estimated production of 587 million metric tons is still 32 million metric tons (5.2%) lower than one year ago.

Soybean Estimates Bumped Up

USDA increased its estimate of the 2006 soybean crop to a record 3.204 million bushels, 15 million bushels higher than last month; 2007 carryout stocks are now pegged at 565 million bushels -- also a record high. Estimated season-long prices for soybeans were increased by 50 cents/bu. -- to $5.40-6.40 -- mainly to keep up with rising soybean futures, which must keep pace with corn in order to retain some acres next spring.

The forecast price for soybean meal was also increased -- from $147.50-177.50/ton last month to $165-190/ton; 2006-crop beans were 3.5 to 8.75 cents/bu. lower today, while soybean meal futures settle $2.50 to $3.00/ton lower.

Buy, Even Though It Hurts

This report contained no big bullish shocks for feed prices, but did nothing to harm the technical structure of the corn charts, which means the upward trends will likely continue. The same is true, in spades, for soybean meal since some of the 2007 meal futures contracts set contract life highs yesterday.

I hate buying feed at these prices, but if you haven't bought some already, you should probably consider it.

One reason for that suggestion is a study released this week by the Iowa State University (ISU) unit of the Food and Agriculture Policy Research Institute (FAPRI), which suggests some major changes for the U.S. pork industry under current ethanol policies. FAPRI will hold a press conference on Monday to discuss the results, but the paper is already published and available at

The premise of the FAPRI report is simple: Oil prices plus the ethanol tax credit plus a value for distillers dried grains and solubles (DDGS), when combined with plant construction and operating costs, create a specific value for corn. FAPRI's estimate is $4.05/bu. As long as the market price of corn is less than that value, new ethanol plants will be built and they will force the price of corn to that level. The only real question is, "What does the rest of United States and world agriculture look like then?"

The picture is not pretty for the U.S. pork industry. Based on ISU estimates for corn and soybean meal usage and prices, hog production costs will increase by about $31/head, or just over 30%. U.S. production would have to fall by 10 to 15% to drive hog prices up enough to make up for this cost increase. That kind of reduction would drive retail pork prices up by 20% or so given historical demand elasticities.

Look for more on this report. The results are preliminary, but quite logical. FAPRI is working on a model for DDGS usage that will tell us much more about the competitive shifts that will occur in the U.S. meat sector. I expect it to show smaller negative effects on poultry and perhaps no effect on beef and dairy since they will be able to utilized abundant supplies of DDGS.

Gestation Stall Battle Lost

As if all of this isn't enough depressing news, the industry lost the battle for individual gestation stalls in Arizona. Voters there approved a constitutional amendment that would ban veal calf crates and swine gestation stalls after Dec. 31, 2012.

Florida passed a similar amendment to ban individual gestation stalls two years ago. It only affected two hog farms. The Arizona amendment is different in that it affects more production, most notably Hormel's (formerly Clougherty's) production units near Snowflake, AZ. What is rather disheartening is that the vote was not even close -- 62% to 38% - even though the opposition represented a well-organized group of Arizona and national agricultural groups.

It is quite obvious that this will not be the last of these efforts. The Humane Society of the United States (HSUS), which has nothing to do with your local humane society, has a large war chest (I have heard $100 million) and has stated its intent to spread these prohibitions. HSUS will very likely attempt to put some animal welfare language into the 2007 farm bill.

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