Market Preview: 2009 Crop Vulnerability Reinforced

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 22 September 2009
clock icon 5 minute read

All eyes are on northern skies this week as everyone involved in the production and use of corn and soybeans watches the weather. A forecast for frost in the northern plains the weekend of 26-27 September lit a fire under both corn and soybean futures markets earlier last week, underscoring the precarious position of this year’s late-maturing crops. Most analysts believe we need at least two more frost-free weeks in Iowa to realize the yields being predicted by USDA.

The potential for lower yields is high this year, but the normal changes of actual vs. predicted yields are just the opposite. Robert Wisner, professor emeritus at Iowa State University, has compiled the long track record of USDA’s September yield forecasts vs. final yield estimates the following January for corn and soybeans. The results of his comparisons appear in Figures 1 and 2.

Final corn yields have been higher than the September estimate in 31 (71 per cent) of the 44 years shown in Figure 1. The difference has been more than 5 per cent in nine (over 20 per cent) of those 44 years. The average change in yield for all years except those with major weather stress has been 2.3 per cent. That would translate to an increase of 3.7 bu./acre this year, nearly 300 million more bushels of corn, if frost does not nip those yields.

Final soybean yield estimates also tend to increase from the September forecast, but the magnitude and frequency of those increases are smaller than those for corn. USDA’s soybean yield increased in only 56 per cent of the past 44 years and the increase was, on average, only 1.8 per cent in those years that did not face significant weather challenges. Such an increase this year would add only about 0.75 bu./acre and increase soybean supplies by about 58 million bushels. That doesn’t sound like much, but in a year projected to be as tight as this, it could certainly make a difference for soybean and soybean meal prices.

The surge of corn and soybean prices on Tuesday underscores just how skittish this market is. Wisner’s forecasts do the same. Being a pragmatic person, he always includes low-, medium- and high-yield scenarios in his forecasts and traces the impacts of those yield levels all the way to projected year-end stocks, stocks-to-use ratios and prices. The relationships of the scenario prices this year are, I believe, quite interesting.

Futures Price Forecasts

Wisner’s forecasted December corn futures price at harvest time for the medium-yield (i.e. USDA’s 161.9 bu./acre figure) is $3.05/bu. His high-yield (164.5 bu./acre) price is $3.00/bu., and his low-yield (156 bu./acre) price is $4.15.

The same figures for November soybean futures are $9.15/bu. for the medium-yield (42.3 bu./acre) scenario, $8.85/bu. for the high-yield (43.3 bu./acre) scenario, and $10.75/bu. for the low-yield (40 bu./acre) circumstance. The corresponding soybean meal prices for those scenarios are $280, $265 and $330 per ton, respectively.

It is obvious that Wisner doesn’t see much bottom-side potential for the prices of either of our major feed ingredients. He does think the high-yield scenarios are likely (based on our earlier discussion), putting probabilities of 60 per cent and 50 per cent on the high-yield scenarios for corn and soybeans, respectively. But the price impacts of those occurrences are quite small – especially when compared with the price impacts of, say, a hard early frost and the low-yield circumstances.

Covering Feed Costs

Putting Thursday’s corn and soybean meal prices into my feed cost index formula provides a chart (Figure 3) that suggests the same thing: Compared to recent price levels, it does not appear that there is much downside potential for feed costs. The level of the 17 September predicted costs is slightly higher than one week ago, but still in the ballpark of the lowest cost levels we have seen since costs began climbing in late 2007.

It is possible that costs could go lower, but Wisner’s high-yield scenarios reflect the nature of recent corn and soybean markets and suggest strongly that any downside potential is limited.

If you are a pork producer who will be in business come springtime, it is a very likely time to lock in a good amount of feed for the coming year. South America could provide some relief, primarily for soybeans in March and April, but even that may not be huge given projected soybean stock levels.

A few years ago, a cattle-feeder/friend told me that he never put a steer on feed that cost more than $500. I asked, "But what about the steer’s potential value?" He replied, "You determine your chance for a profit in cattle feeding primarily by how much money you tie up in the first week."

The exact number in his rule of thumb may have changed, but the principle is sound: Establishing a reasonable cost level is a primary determiner of profit possibilities. I think your best chance to establish a reasonable cost for hog production in 2009-2010 is at hand. If you are going to be in the business, it is time to act on at least a portion of your feed needs for the next crop year.

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