Market Preview: USDA Forecasts Grain Stocks Up, Prices Down

by 5m Editor
11 October 2008, at 8:00am

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.

USDA’s October Crop Production and World Agricultural Supply and Demand Estimates, released Friday morning, reported higher corn yield and production estimates, and slightly lower soybean yields but, due to a projected increase in harvested soybean acres, higher soybean production. Both of those estimates – plus, no doubt, some concern about the impact of current macroeconomic issues – resulted in significant reductions of USDA’s price forecasts for 2008-2009. See Table 1 for the key numbers from the report as well as pre-report estimates published by DowJones.

Corn supplies were increased due to an upward adjustment of 49 million bushels in beginning inventories (based on September’s Grain Stocks report), and an estimated yield of 154 bushels per acre, 1.7 bushels higher than the September estimate and 2.9 bushels per acre higher than last year.

Corn Harvest Far Off Pace

Anecdotal evidence indicates very good corn yields in areas which have begun harvested. But Monday’s Crop Progress report indicates that harvest, at just 14% of acres, is FAR behind both last year (39%) and the average of the past five years (30%). Further, the western Corn Belt that accounts for a huge portion of the crop, and saw the most difficult planting conditions, is farther behind than other areas.

The yields that I have heard came from Illinois and Indiana, and I know that the crops in Illinois could hardly have looked better at any time during this growing season – so I would expect excellent yields from those acres. USDA reported only 3% of Iowa acres harvested as of last Sunday, and my driving over the past week would confirm that. And the number of green leaves I saw in cornfields would also confirm USDA’s estimate that only 66% of Iowa corn acres were mature last Sunday. This harvest is going to take awhile.

USDA Cuts Ethanol Use

USDA also reduced projected ethanol usage and other food, seed and industrial usage, but raised feed usage by 150 million bushels. That increase makes sense in light of the September Hogs and Pigs Report. The HUGE 8-11% reductions of broiler egg sets seen in recent weeks will reduce feed needs some but USDA, in my opinion, still had it too low in September so the increase is, I think, a proper change. It may still not be enough but it is an improvement.

Corn Carryover Gets Boost

The net effect was to increase projected carryover by 136 million bushels to 1.154 million bushels. But that is still 29% lower than last year and makes the 2009 crop very, very critical. In spite of lower carryover, USDA’s price forecasts were reduced by $0.80/bushel to reflect lower futures prices. The weekly chart for corn futures and the daily chart for December futures appear in Figures 1 and 2, respectively. The weekly chart has now covered a gap at $4.19, but has left two gaps during this leg downward with the highest being at $6.08. That will serve as a technical objective after this market makes a bottom.

Huge Feed-Buying Opportunity Exists

The daily chart all show some signs of bottoming after this huge sell-off. I think the price decline has been driven by fear of a global demand decline and the liquidation of long positions by many funds and speculators. I also think this is a HUGE buying opportunity! Ethanol plants can still pay $5 and more for corn and OPEC announced yesterday that they were considering an oil output reduction aimed at stemming the decline in oil prices. How many readers ever thought they would get the chance to buy corn and soybean meal at a level that would allow production costs in the low $70s/cwt carcass weight through 2009? I doubt there are many provided they answer honestly! Don’t miss this chance to manage costs.

Broilers’ Decline is Pork’s Gain

Some help may be on the way from the broiler business. Figure 3 shows an updated version of my weekly broiler egg set chart and features the two largest year-over-year declines on record. The 11.5% decline for the week of Oct. 4 is far and away the biggest ever, and suggests much smaller chick placements in November and lower production as early as late December. Broiler companies cannot place a chick without setting an egg. That reduction of supply is critical for pork due to the close competitive relationship that has developed between the two meats over the past few years. For better or worse, we are an “Other White Meat.“ This could be one of those better times.

5m Editor