Market Preview: Crop Reports Offer Hope

US - Weekly U.S. Market Preview w/e 14th September, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 15 September 2007
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The focus of most of U.S. agriculture this week was the monthly USDA Crop Production Report released on Wednesday. Some of the highlights were:

  • An even larger record corn crop than USDA had predicted in June. USDA has now pegged this year's crop at 13.308 billion bushels, up from the 13.1 billion predicted by the June report. That breaks the old record of 11.8 billion bushels set in 2004.
  • The second highest national average yield on record at 155.8 bu./acre. This is 5.8 bu. above the 1980-2006 trend yield and 1.7 bu. above the 1996-2006 trend yield. That latter period covers the advent of genetically engineered corn varieties, but does not include any years with widespread adverse weather conditions. The longer trend period includes some very tough weather years (1983, 1988, 1993) and the impact of genetically modified crops.
  • Some slight, but interesting, changes in projected usage. USDA increased projected feed and residual by 100 million bushels (to 5.85 billion), reduced projected ethanol usage by 100 million bushels (to 3.3 billion) and increased projected corn exports by 100 million bushels (to 2.25 billion).
  • The combination of higher output and slightly higher usage is projected to leave 1.675 billion bushels of corn in storage at the end of the '07-'08 crop year. That is up from last month's projection of 1.516 billion bushels and last year's 1.142 billion.
  • USDA left its predicted range for the national average farm price of corn at $2.80 to $3.40/bu. even though the projected ratio of carryout stocks to total usage increased by roughly 1% (see Figure 1). USDA's price forecast still reflects a significant increase in corn demand.
  • The projected soybean crop was reduced slightly, from 2.625 billion bushels to 2.619 billion. After some adjustments to projected crush and exports, year-end stocks were lowered slightly and USDA's projected soybean price was increased to $7.35 to $8.35/bu., 10 cents higher per bushel at both ends. Forecast soybean meal prices were increased to $205 to $235/ton, $5 higher than they were in June.

Figure 2 shows my index of hog feed costs as of the close of Chicago Board of Trade (CBOT) grain futures trading on Thursday. This graph represents the cost of the corn and soybean meal to make a 16% crude protein hog diet. The blue line is actual cost based on cash corn (Omaha) and soybean meal (Decatur, IL) prices. The other lines are forecasts based on CBOT futures prices on the dates shown.

Forecast feed costs for the remainder of 2007 and the first part of 2008 have dropped significantly since mid-June, when futures prices were high before we knew whether this year's crops would receive enough rain. The $18 to $20/ton reduction drove costs for this period down by roughly $3/cwt. of live hog produced.

But the green line labeled "Sept. 13, 2007" also clearly shows the challenges that lay ahead. The feed cost index increases by roughly $16/ton by June as corn and soybean meal futures reflect the marketplace competition for crop acres next year.

And let us not forget that ethanol production capacity is still growing at a rapid clip. The latest count by ISU's Center for Agriculture and Rural Development (CARD) shows that there are still 77 new plants under construction and eight plants that are being expanded. When completed, these plants will add the capacity for 6.65 billion gallons of ethanol to our current capacity of 6.7 billion gallons. That means that the annual rate of corn usage for ethanol will double by the end of 2008.

It is nice to have more affordable feed for now, but we have only dodged one bullet so far.

Pork Exports Down, But Prices Are Up

July's pork export data was a bit more encouraging than that of the previous few months. July exports were 2.4% larger than one year ago -- the first positive month since January. The growth was provided by Canada, China-Hong Kong (up 227% from July 2006, which was supposedly before the big China purchases) and Russia.

Shipments to Japan were 2.2% smaller than in July 2006 and shipments to Mexico continued to be dismal -- though less dismal than in recent months at -24.7%.

Total 2007 U.S. pork exports through July are now only 2.8% below last year on a carcass weight basis, 4.9% on an actual product weight basis. The value of those exports, though, is still nearly 5% higher than last year, and I would argue that this is the most important figure when it comes to exports' contribution to U.S. pork and hog demand.

So the news is better and I still have hopes that we will set our 16th straight record for pork exports. Much of that will depend on China.

The futures markets still appear to have significant China business built into prices since expected supplies and hog demand steady with 2006 do not provide forecast prices nearly as high as current futures prices. The deferred contracts are all nearing contract life highs, so I think Chicago Mercantile Exchange (CME) Lean Hogs futures are still providing some good pricing opportunities for producers.

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