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Economist: Corn/feed grains markets look simply ominous

The squeeze on world grain stocks will continue at least for several years. And to prevent further ending stock slippage, everyone should be praying for a perfect weather the rest of this growing season.

That's the verdict of Keith Collins, who, before retiring in January, served for 15 years as USDA's chief economist.

“I'll focus on the basic outlook for commodities in the upcoming year of 2008-09,” said Collins, in a recent press conference sponsored by the Environmental Working Group.

“I'll use the USDA views of the 2008-09 view for major crops, which is the most important global benchmark for what's likely to happen.”

Having worked at the USDA, “I understand where the numbers come from. So, it's a comfortable place for me to start.”

Predictions are tricky and many things will determine how markets turn out this year. However, there are some givens: “Biofuel expansion is critical; global income growth, the value of the dollar, governments protecting their markets and the weather will all be factors.”

In the coming year, among major crops, the U.S. and global wheat market balance improves the most. But corn and other feed grains are expected to move to a level of “extreme tightness that's rarely been experienced in our history.”

The current wheat-marketing year ended May 31. At that point, U.S. wheat stocks were at 10 percent of total U.S. use of wheat over the past year. That equates to about a one-month supply.

“So, it's very tight and has meant record-high wheat prices.

“Looking ahead to 2008-09, global wheat production is expected to be up 50 million tons, about 8 percent. I believe the U.S. crop is faring pretty well and (northern hemisphere) crops in foreign countries are also faring well.”

Collins believes a rebound in global wheat production seems quite likely. If realized, “U.S. wheat stocks at the end of 2008-09 would increase to 22 percent of use — or an 80-day supply. That would provide relief but would still leave supplies well below average. And the firm level wheat price is forecast at yet another record — $7.35 per bushel.”

For market analysts and consumers, the corn and feed grain markets for the coming year “simply look ominous. I don't know of a better word to describe it.

“We had record-high corn production last fall. Despite that, when the corn year ends Aug. 30, our corn stocks are expected to be up only slightly.”

Meanwhile, this year, total corn use is at a record high. That has led to a record farm price expected to average $4.25 per bushel.

As worrisome as this year has been, “I think the prospects for 2008-09 look much, much tighter. Using acreage that farmers said they'd plant in the March planting intentions survey — and we won't know the final numbers until (later in) June — but because of cold, wet weather that delayed planting, yields are expected to be slightly below trend.”

With lower acreage and little yield expansion, U.S. corn production is expected to fall well short of total corn use. “Ethanol demand is forecast up another billion bushels — equal to 33 percent of 2008 corn production. And stocks would fall to only 6 percent of use — a 22-day supply, the second lowest in the past 49 years.

“Farm-level corn prices are expected average a new record high of $5.50 per bushel.”

On soybeans for 2008-09, “only a modest increase in carryover stocks is expected from this year's low level. That's despite an expected 11 million more planted acres this spring. Soybean prices are projected to be up again and average $11.25 per bushel.”

Looking at these prospects, Collins notes three key implications:

  • Wheat markets are likely to get some relief from tight supplies, “although prices will remain high and we'll be very dependent on the weather in southern hemisphere wheat, which is only now being planted.”
  • The corn and soybean markets will not allow stocks to bounce back to normal after a year or two. “Growth in biofuel production is going to ensure that we face persistent tightness and high prices for at least several years. For example, looking ahead to 2009, we'll need 5 million, or more, additional corn acres just to keep stocks at the historically low level expected in 2008-2009. “So, corn with low stocks and high prices will be trying to pull acres from soybeans, which also will have low stocks and high prices.”
  • There's “virtually no cushion” for any type of significant weather-reduced crop — especially corn. “The forecast of the second lowest stocks-to-use ratio in 49 years already assumes that U.S. corn exports will be down by 16 percent and feed residual use will be down by 14 percent in 2008-09.”

The rest of the world needs grain and oilseed. “I think they'll be looking toward the United States. If we don't pull a (good) crop, particularly corn, domestic users — both feed and fuel users — are highly vulnerable to serious financial problems. This could cause very serious disruptions both to livestock producers and ethanol production.”

Collins is uncomfortable predicting yields. “But I will say, that just looking at an empirical yield distribution for corn, you can conclude that about one out of every seven years we have a yield reduction of 15 percent, or greater.”

What would a 15 percent yield reduction do to the 2008 crop? “It would reduce yields by about 23 bushels per acre and reduce production by about 1.8 billion bushels. So we'd have to reduce demand or stocks by 1.8 billion bushels below the current levels we're projecting, which are already low.”

Very little of that could come out of stocks, says Collins — maybe 200 million bushels. “We'd have to take about 1.5 billion bushels out of an already reduced export level, feed-use level and/or ethanol. And, of course, with ethanol we face the (federal use) mandate so it can't be taken from there unless the mandate is waived.”

And that isn't all. Collins says his “instinct” is that more surprises are to come. “As I look out over the next couple of years and scratch through supply and use scenarios for corn, soybeans and wheat, they look like persistently tight markets for two, three and four years with little ability to rebuild stocks.”

We can live in that environment. “Not easily, but you can live with high prices provided there are normal yields.”

There's “every likelihood” crops won't achieve normal yields in one, or more, of those years. “So, it seems to me we will see more surprises.”

After all, the latest market conditions are a surprise. “We didn't anticipate this. No one, a couple of years ago, was forecasting $5.50 corn for this year …. Most of the average prices (predicted) for the next five years were in the range of $3.70 to $3.90 per bushel for corn. Now, when you look at the cash and futures markets, we're in the range of $5.50 to $6.30 — and that's without bad weather.”

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