Markets

Corn    

Soybeans In the trough By Dr. Robert Wisner Weather, planting progress and crop development will be key market factors for the next few weeks. With favorable crop prospects, bean prices would have moderate downside risk by late summer and fall. Watch for rallies as opportunities to boost old- and new-crop sales. Despite disappointing U.S. soybean yields last fall and drought-reduced production this spring in Argentina and southern Brazil, world supplies should be adequate to meet demand and still leave modest carryover stocks. Demand for U.S. soybeans has been down in almost all major markets except China. Chinese consumer demand is slowing as their economy responds to reduced demand for industrial goods from the U.S., Europe, South America and other areas. However, after last year’s extreme market fluctuations, the Chinese government has placed priority on building reserve grain and soybean stocks. In sharp contrast to the sharp decline in U.S. corn and wheat exports, U.S. soybean exports since last Sept. 1 were about 14 percent above a year earlier as we went to press. Because of its emphasis on reserve stocks, Chinese purchasing patterns will also be an important potential market influence this spring and early summer, along with weather and U.S. crop progress. China usually shifts most of its soybean purchases to Brazil and Argentina during the spring and summer. Domestic demand for soybeans has been sluggish so far this season because of depressed livestock and poultry feeding returns and sharply lower petroleum prices. That combination has reduced soybean crushing margins to about half the level of a year earlier and has triggered a moderately reduced crush. With the sharply lower prices for diesel fuel, depressed biodiesel blending economics have led to the closing of many biodiesel plants. Many of the plants can be closed for an extended period and then re-started later if profitability improves. But it may be a while before profits return to the industry. The sluggish global economy has reduced the demand for motor fuel in the U.S. and world-wide. Also, Europe is taking steps to discourage subsidized biodiesel imports from the U.S.

An eye for even modest strength  

By Dr. Robert Wisner

Planting timeliness, South America and recently sold ethanol plants will be factors

As you finish plantings and other spring fieldwork operations, watch for market rallies as opportunities to boost old- and new-crop sales. Except for an occasional year of major drought or flood concerns, some of the best marketing opportunities often occur before mid-June. Demand indicators remain weak, so weather is the main factor offering potential for a substantial rally. Most of the Corn Belt has a good sub-soil moisture reserve to start off the growing season—except for parts of southeastern Minnesota, central and northern Wisconsin. Too much rain this month and worries about delayed plantings could strengthen prices. If delays are widespread across the Midwest, the impact could be twofold: 1) A shift of some corn acres to soybeans; 2) Possible reduced corn-yield potential if the delays extend beyond May 15 to 20.

The two most visible sources of corn demand are 1) weekly export shipments and sales, and 2) corn processing for ethanol. As we went to press, cumulative U.S. corn export shipments since the start of the marketing year (last Sept. 1) were down 40 percent from a year earlier. U.S. corn exports are likely to move a bit closer to a year earlier from late April or May into next fall. That’s because of estimates that the South American corn crop will be down sharply from a year earlier. By mid-February, trade, South American government and USDA sources all foresaw a sharp decline from a year earlier in South American corn production. In the last few years, Brazil and Argentina have been our largest competitors in corn exports. Although their weather problems have been quite serious, shortfalls in their crops should be partially offset by very large old-crop grain supplies and exports from the Black Sea. Russia and the Ukraine had large wheat crops last year and have been exporting both feed wheat and feed grains at competitive prices.

The U.S. ethanol industry continues to struggle with about 20 percent of its formerly operating capacity shut down. However, some of the idled plants may soon start operating again. Buyers of bankrupt facilities indicate they hope to get those plants operating soon. If so, that will be a slightly positive influence on corn prices and will increase potential market volatility in case of serious weather concerns.

Dr. Robert Wisner is an agricultural economist at Iowa State University.

Cattle

Beef's downhill struggle

by Glenn Grimes

USDA revised its Jan. 1, 2008, cattle inventory down by 0.7 percent which means the 2008 herd was down 1 percent from 2007. The 2009 cattle herd at 94.5 million was down 2.6 percent from the peak of this cycle in 2007 and down 1.6 percent from 2008 (see chart).

In the current cycle, which began in 2004, the cattle herd increased for only 3 years, the same as the 1979-90 cycle. The downside of the 1979-90 cycle was relatively long due to weakness in beef demand. The buildup in the current cycle has been aborted because of high feed costs and losses in beef demand. Let’s hope we do not have to reduce numbers for 8 years in the current cycle to get supplies in line with demand.

Because of the energy situation and using feed grains to make biofuels, grain prices are now tied to oil prices. Corn prices are likely on a plateau, which is around $2 per bushel higher than in the late 1970s, 80s and 90s. This much increase in feed cost requires that beef production be reduced to get supply in line with the weaker demand.

Beef demand peaked in 2004 after 5 years of growth and has declined for 3 of the last 4 years. In 2008 our demand index was down 9.6 percent from 2004 but has shown some strength recently. The weakness in beef demand in 2005-07 was probably due to larger supplies of competing meats. In 2008 a portion of the weakness was due to a weak general economy.

There was good news for beef demand in late 2008 and early 2009. For November through January, our index of U.S. consumer demand for beef showed a small growth of 1 percent. This was surprising with the continuing weak economy. Three months is not a long enough period to predict a trend, but we will take anything we can get for strength in demand.

USDA estimated the number of beef cows in the herd on Jan. 1, 2009, was 3.9 percent below the current cycle peak of 32.9 million head on Jan. 1, 2007. The 2008 calf crop at 36 million head was down 3.7 percent from the largest calf crop of the current cycle in 2006.

Some observers of the cattle industry believe USDA over-estimated the number of cows by a substantial margin. This may be true but it’s not likely by as much as they believe. USDA uses the best sampling technology and has much larger resources to devote to this estimate than anyone else. Also, USDA had the benefit of the 2007 Ag. Census to benchmark their estimates. Therefore, it is a substantial risk to bet the USDA numbers being over-estimated by very much.

Glenn Grimes is an MU professor emeritus and long-time market analyst.

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