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Large stocks burden corn, soybeans

The market wanted big U.S. corn and soybean crops, and according to USDA's latest crop report, it's going to get them.

“Growing conditions for most of the country have been good,” said Alan Brugler with Brugler Marketing and Management, an advisory and consulting service in Nebraska, during the September Ag Market Network. “We're hearing about some huge yield numbers in early-harvested corn fields.”

USDA projected a record corn crop of 10.96 billion bushels in its Sept. 10 crop production report, up from an average trade guess of 10.85 billion bushels.

The U.S. crop production estimate for soybeans is 2.84 billion bushels. That's down slightly from the trade estimate, but still a large crop.

According to Brugler, the corn market still must deal with the risk of an early freeze or even a normal freeze in the northern tier states — North Dakota, South Dakota, Minnesota, Wisconsin and Michigan. “The bushels in those states are not in the bin or fully mature. The heat units we've been seeing over the last week to 10 days have really helped the crop.”

Brugler says about 2 billion bushels of corn were still at risk in mid-September. “If you have a freeze at early dent, you'll realize approximately 68 percent of normal yield. If it's at full dent, you'll get 78 percent; late dent, about 85 percent. At the half-milk line, it's 93 percent. Once you're at black layer, you're at 100 percent of actual yield.”

According to USDA, 75 percent of the U.S. crop is at full dent, “so a lot of the crop is past the stage where a freeze would significantly hurt it.

“We still could lose 300 million to 400 million bushels if there were a hard freeze before Oct. 1.”

If that happened, U.S. ending stocks would drop from 1.21 billion bushels to 800 million to 900 million, “and we would be back in a holding pattern similar to last year, where with stout usage we would need another big crop for 2005.”

Meanwhile, corn demand continues to rise on the heels of strong ethanol demand, according to Brugler. “It's a good business to be in right now with high gas prices and low corn prices.”

Livestock demand is also strong, according to Brugler. “If there is a fly in the ointment, it's on the export sales side. USDA has a very aggressive export estimate of 2.1 billion bushels. But we don't have much evidence that we're on track to meet it.”

Worldwide, USDA estimates coarse grain ending stocks at 130.32 million metric tons, up almost 4 million tons from the previous month's estimate. That is about 2 million tons more than ending stocks from last year.

“Since 1998-99, we have been in a pattern of world coarse grain ending stocks declining each year, which raises the theoretical average world price,” Brugler said.

“Since the market broke that four-year uptrend, September futures got below the trend line of $2.16 and traded as low as $2.07. The next support is $2.04, the low from a year ago. So we have changed the pattern with that buildup in world coarse grain stocks, and that's putting more pressure on corn in the short run.”

On the other hand, if the United States has a smaller crop, world stocks could decrease and firm up prices.

Prices are expected to follow a normal seasonal pattern, with a low in the fourth quarter, according to Brugler. “On average, the cash corn low typically occurs during the second week of October. That's when basis tends to widen and the cash price tends to bottom.”

The short-term scenario is that we have a short-term stocks buildup in corn and a record-large crop in the United States. If the crop gets nicked a little bit, we could tighten world stocks and probably put in a fairly normal fall low.

“Once we find that low, we have a reasonable expectation that over the next 12 months we'll see an average move of 93 cents from low to high,” Brugler said. “The smallest move we've ever had is 44 cents.

“There a tendency that once we're down in price and stay down in price for a while, growers want to sell on the first 20-cent rally. We don't want to do that,” he said. “There's a good potential for a (larger) rally this year. Even with stocks at 1.2 billion bushels, with the demand we have domestically, we have to have another big crop in 2005. The market is going to have to insure that producers plan to plant at least as much corn as they did this year.”

Soybeans below $5?

Projections of a huge world soybean crop and a world ending stocks estimate of 51.5 million tons — the biggest on record — could push soybean prices below $5, according to Brugler.

Soybean production in Brazil is expected to rebound from 52 million tons this year to 66 million tons next year, while Argentina production is forecast to increase from 34 million tons to 39 million tons.

“There are some questions about those numbers, especially in Brazil, where Asian rust has been a problem,” Brugler said. “USDA is assuming Brazil will go back to normal yields, but they are building in a 4 million-ton loss for Asian rust. What they're not building in are the drought losses which occurred in the southern part of Brazil last year and the flooding losses in the Matto Grosso region.

“They're also assuming with the price signal that the market is sending with $6 November beans, Brazilian producers are going to plant more. USDA's 66 million tons is based on an expansion in acreage and normal yields.”

The increase in Argentina production is primarily due to improved yields and improved weather.

A $5 trading range in soybeans that pushed prices over $10 a bushel in 2003 “was unusual,” noted Brugler. “We are going to tend to look over our shoulders and think $5.50 to $6 beans are too cheap. But with $10 beans, we had price rationing because we thought we were going to run out of beans.

“Are we still coming down off a high? In November beans that was $7.99, which would imply a low of $5.99 was far enough (with an average trading range in soybeans of $1.96). Or are we trying to find a new low coming off an unusually volatile year, and we haven't gotten there yet. My technical view is that we're not there yet.”

The big problem is huge world ending stocks, according to Brugler. “If that is accurate, we're going back below $5 on beans.”


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