The fear fed on itself. Corn plunged 60%; in a week, soybeans fell $1.40 in two weeks; and wheat dropped by 90%;. Price charts turned negative, fueling further selling by speculators. Producers slammed the bin doors shut, and end-users stepped in to buy at the cheapest levels they had seen in many months.
Up or down next?
Differentiating a price break fueled by fear from a genuine reversal of market fundamentals will take time but by then market opportunities may be long past.
U.S. producers do have more acres available for spring crops in 2010. A lot will go into corn and soybeans, all but eliminating the need for $5 corn or $10+ soybeans. This will hang over the markets until the March 31 Planting Intentions are released, perhaps longer if large acreage increases are confirmed.
Analyzing where the shortfall in winter wheat acres occurred, and what states had maturing CRP acres, shows diverse acreage gains, including hay/pasture. Rough farm surveys support the idea that farmers will add acres to a number of crops rather than all the gains going to corn and soybeans.
The table, U.S. Crop Acreage on pg. 24, shows a potential acreage scenario. Adding 3.5 million corn acres in the United States could increase production around 500 million bushels; and 2.7 million additional soybean acres would raise around 120 million bushels. Both of these assume a repeat of ’09 high yields. It’s too early to assume record yields, and it’s too early to know that these acres will even be planted. An early S&D estimate for 2010 crop tells us to expect bigger U.S. ending stocks in 2011, and perhaps higher global stocks, but global demand is rising annually and bigger crops are needed — overseas and here in the United States.
The South American soybean crop being harvested this winter is huge, up 1.1 billion bushels over ’08 crop. The United States will lose a lot of export business to their massive crop. But USDA forecasts South American soybean exports to decline not increase, for their ‘09 crop. The United States has already captured the lion’s share of China’s imports, and Brazil and Argentina need to rebuild their pipeline and carryover stocks, which were sharply reduced after their 2008 crop production shortfalls.
In aggregate, global consumption of coarse grains, wheat and soybeans is rising approximately 30 million tonnes/year. It takes about 23 to 24 million acres added each year at a global weighted yield, or the equivalent in higher yields per acre, to grow that much.
The roller coaster of grain and soy prices may plummet further, but attitudes could change quickly. Acreage changes, planting delays or yield problems could suddenly drain global stockpiles to uncomfortably tight levels again.
Merchandisers and end users can benefit from this downhill slide, whether temporary or long-term. The perception of an improved stocks/use ratio may keep futures carries wide and basis weak and allow elevators to earn carries. U.S. corn quality is not great this year which is setting up a two-tier basis; one value for #2 yc and another cheaper value for ‘other’ corn.
End users have opportunities to reduce corn, wheat and soymeal costs to the lowest levels in several years just as livestock, poultry and ethanol prices have climbed. End users may be able to cut costs even more if they can utilize lower-quality corn, or some of the growing surplus of corn screenings which are now trading down to 60% of corn.
The roller coaster may plunge further but end users should set up a buying schedule for the ride down rather than waiting for some unknown bottom. Buying corn scale-down every 10 cents or soymeal every $10 lower on a sizable percentage of ingredient needs for spring and summer could result in attractive average costs. This is also a year made for using put and call options to fine-tune pricing strategies in markets that may not be sure where they’re going.