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Salvo of January Reports Torpedo Grain Markets
The January reports date is always busy for the grains markets, but now, with extreme uncertainty regarding the global economy, and just months after record high prices in nearly all commodities, the reports were even more anticipated than usual. The news that they brought was not good for grain prices. The Grain Stocks report indicated that demand for grain was softer than expected, the Crop Production report raised harvested acreage and yield for both corn and soybeans. The World Agricultural Supply and Demand Estimates show weaker demand expectations for the 08/09 marketing year. The only bright spot, however dim, for prices was that winter wheat plantings were down, though the market already fully expected this. The result is that the rally of the last month appears to be over for the time being, as the markets take stock, and contemplate the new year.
The corn markets were hit the hardest. The Crop Production report increased estimates of planted and harvested acres, by 100,000, and 400,000 acres, respectively, and increased estimated yield for the 2008 harvest by 0.1 bushels, to 153.9. Ohio’s estimated yield is now 135 bu/acre. Nationally, the net result is an increase in total estimated corn production of 81m bushels. Recent export performance and the results of the grains stocks survey in December indicated sharply lower demand. US feed demand was cut by 50m bushels, ethanol demand was cut by 100m bushels, non-ethanol FSI was cut by 35m bushels, and exports were cut by 50m bushels. The net result is an increase of 300m bushels in 2008/09 ending inventories, to 1.79bn bushels. Adding insult to injury, global feed grain supplies were increased 5.1mmt, due primarily to higher US and Chinese production. Weaker global demand reduced projected consumption, resulting in an increase in world stocks of 12.2mmt compared to last month’s projections, which is 20mmt more than last year, 178mmt vs. 156mmt. As would be expected, the market reacted very negatively to this news, with all contracts limit down. Potentially the most damaging aspect of these reports for the corn market is that the weaker demand doesn’t look like it will be a one year phenomenon. Combined with higher initial inventories for next year, these reports remove much of the worry about the 2009 crop year—not only will there be a large carry-in to buffer any production shortfalls, but demand will be weak.
The news for the soybean markets was only slightly better. Although planted acreage for 2008 was revised downwards, harvested acreage was increased by 200,000 acres. Yield was also increased, by 0.3 bu/ac, to 39.6. The combination of increased acreage and yield resulted in 40m more bushels of production for 2008. Slow crushing demand reduced consumption by 30m bushels, but strong export sales resulted in a 50m bushel increase in projected export sales. The net result is a 20m bushel increase in ending inventories, from 205m to 225m bushels. While this is still well below last year’s record 574m bushels, it is still significantly above the psychologically important 200m bushel threshold. However, unlike corn, there is no evidence of a broad-based, dramatic slowdown in soybean demand. There is softness in domestic crush, but to this point, exports have taken up the slack. These reports will significantly increase the focus on export sales, however, as they have provided a tremendous amount of support to soybean demand.
Feed demand for wheat was reduced 30m bushels, resulting in an increase in ending inventories to 655m bushels, but otherwise the domestic balance sheet is unchanged. Global wheat production is down slightly, due to drought-reduced yields in Argentina and lower revisions in France, as well as minor upwards revisions to a number of countries around the world.
The cumulative effect of all of these changes is weighing heavily on the market. Most worryingly, there doesn’t appear to be much hope for higher prices in the short- or intermediate-term. While a month ago, I expected a price rally in the winter based upon some acreage competition, the weak demand for corn, especially from ethanol and exports, and ample ending stocks mean that, with trend yields of 157 bu/ac, corn could surrender 2m planted acres and prices would still move lower. However, there is no compelling scenario in which the soybean market ‘needs’ additional acreage. Our soybean supplies are more than adequate. Cotton inventories remain below normal, and acreage remains depressed, though prices are also low historically. Therefore, it seems unlikely that cotton will absorb more than 1-2m additional acres this year. Indeed, instead of the battle for acres among crops that we have seen over the past 3 years at this time, this year we have a battle from acres, as weakening global demand, and a weakening ethanol market have created a situation of surplus acreage. Further, I still wonder about the CRP acreage that wasn’t renewed that was so widely discussed six months ago. If most of that land is in the Plains, then it may be that wheat seedings gives us a too optimistic view of the true acreage situation. There may be more land to be planted this spring in western states than is implied by the seedings report. From a marketing perspective, this leads me to believe that we may have already seen the strongest of the winter rally, and prices will decline from this point to the range of $3.80-$4.00 for the December ’09 CBOT contract, where they will wait to gain a better handle on farmers’ planting intentions.
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