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Has corn bull market gone kaput?

Is another bull market in the running for corn despite bearish news from USDA for higher ending stocks and production? It's apparently a tough question for analysts to answer.

USDA's Aug. 12 corn production estimate of 12.3 billion bushels was higher than the trade expected, due in part to higher expected harvested acreage and yields. Good corn-growing weather in the Midwest has boosted the crop's yield potential significantly.

“But it's important to note that most of that unexpected production gain was offset by higher demand,” said Richard Feltes, grain analyst with MF Global, speaking at a CME Group's press briefing.

He noted that ethanol usage, pegged at 4.1 billion bushels, “inferred to me that ethanol demand would be at least 4.5 billion bushels for 2009. This suggests that we indeed will have to come up with more acres for the corn and soybeans combined.

“It puts into question the wisdom of the agriculture secretary's early decision not to release land from the Conservation Reserve Program. He could have waited until the harvest to see what the corn crop was going to look like. But that's behind us, and it underscores that we are going to be in a tight acreage situation.”

USDA's estimate of soybean production was less than expected, at 2.9 billion bushels, compared to 3 billion bushels estimated by most analysts. USDA lowered exports by 15 million bushels and continued to project tight carryovers for new crop and old crop beans.

Feltes is also concerned about the real nature of the corn and soybean crops, which suffered from late planting and flooding earlier in the year.

“In the view of the people I've talked to who have been actually looking at the crops, and doing field testing, the soybean and corn corps are dramatically different from what USDA says. They are much more cautious and conservative because of the delayed development and variability of the crop.

“We are still very early in a cycle. With delayed crops, a lot can happen.

“The historical trend is if we can have a later-than-normal frost date, the potential of the crop is fairly good because of the absence of moisture stress. But the weather forecast is still favorable and there is a history of both corn and soybean crops increasing from August till the end of the growing season.”

The numbers on corn should become more reliable when USDA moves into more specific measurements, noted Dan Basse, AgResource Co.

“We still aren't measuring test weight, which in these kinds of years tends to be on the short side. I look at Iowa's corn yield, which USDA says is the same as last year at 171 bushels per acre, and I have to scratch my head a little bit.

“If you've been to Iowa and you've looked at fields, that number just doesn't feel right. I believe the September report will have larger crops than this report. But I feel like by the time the combines are in the field, if we don't find the actual supply there, it could start a rally as we look ahead to next year.

“Based on the ethanol demand that is forthcoming and the need for 94 million to 96 million acres of corn next year, what price buys that acreage with the cost structure that farmers now have?”

Basse noted that despite high world grain prices, global grain stocks of corn, soybeans and wheat are only up 11 million metric tons.

“In prior cycles like this, if we go back to bull markets and the need to build supply and acreage, we would see global grain stocks up 50 million to 60 million metric tons. So the world is not awash in grain.

“It leaves me with this cautious feeling going forward that if there is some kind of supply abnormality or dislocation, these grain markets will respond very vigorously and abruptly to the upside. We just don't have enough supply cushion left.”

Very tight ending stocks for soybeans, at 135 million bushels, “tell me that the $11 to $11.50 area relative to November should be good support,” Basse said.

“But I caution you that we have the harvested-to-planted ratio back to 94.5 percent, so if yields were to rise a bushel or two, it would have a significant bearish aspect on soybean stocks.”

While USDA pegged U.S. corn ending stocks at 1.13 billion bushels, they may be a little low on feed and residual use at 5.3 billion bushels, according to Basse. “We could add another 100 million to 150 million bushels there, which could push corn ending stocks to 1 billion bushels at the end of the year. That's still historically tight, particularly with the export number of 2 billion bushels.

“As we step back from all these markets, the next six weeks will be important,” Basse said. “We don't know how low the crude market will go or how much fund disinvestment is yet to come.

“But as we formulate our bottom sometime between now and the end of September and the first part of October, there will again be another bull market in grains. I do not feel comfortable that the world has enough grain to get us through the next nine to 12 months without any upside price potential.”

In his monthly update on the crop report, market analyst Richard Brock says corn yields could climb as high as 158 bushels over the last six weeks of the season. “We've had ideal growing conditions.

“The only thing of concern right now is the very cool evening temperatures throughout the Midwest. We're actually behind in total growing degree days than we were a year ago.”

Brock says the long-term bull market for corn is over. “Farmers waiting to sell corn at $8 might be waiting a lifetime. I don't think we'll challenge this summer's top in corn in the next three to five years. This was a classic bubble in the oil and grain markets, just like the high-tech stocks bubble back in 2000. It says corn prices are more highly correlated to crude oil prices than anything else I've ever seen. This whole corn market is tied to energy more than anything else.”

Brock says the corn carryover of 1.152 billion bushels “doesn't justify an average price much above $5.50. We were trading six weeks ago at over $7, and people can recognize today why that was so grossly overpriced. But we'll still get to 92 million acres because $5 plus corn is still a very profitable venture.”

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