As corn and soybeans move from a supply-driven to a demand-driven market, analysts urge producers to protect their LDP payment for corn, which on Oct. 12 ranged from 43 cents to 47 cents in several Mid-South states. Meanwhile, the soybean market will turn its focus to China's demand and forecasts for declines in Brazilian production.
In its Oct. 12 crop report, USDA estimated U.S. soybean production at 2.97 billion bushels, up from last month's 2.856 billion bushels and down from last year's 3.12 billion bushels. Corn production was estimated at 10.86 billion bushels, up from last month's 10.64 billion bushels, and down from last year's 11.81 billion bushels.
The larger corn and soybean production is due to good yields reported by U.S. growers. This is especially surprising considering the stressful weather in the United States this year. The increase in corn production is led by the western Corn Belt, where early harvest results have been stellar.
Now that the market has a better handle on the size of these U.S. crops, attention shifts from supply-driven markets to demand-driven markets, according to Brian Bastings, an analyst with Advance Trading, Inc., speaking at a press briefing at the Chicago Board of Trade. “We're going to see how aggressive the Chinese are in buying soybeans and whether or not $2 corn stimulates end user interest.”
According to James Bower, Bower Trading, Inc., there is “tremendous expansion in China's dairy herds — 10 percent to 20 percent annually. It is where China is building a much bigger demand base than most of the world knows. I don't see any letup in Chinese consumption of protein whatsoever. It's only going to get better. I see China as a net importer of corn by 2007.”
Supply concerns could jump back into the picture, however, if reports of lower soybean acres in Brazil and the possibility of lower yields there come true.
“We could see a 3 percent to 4 percent reduction in acreage due to higher transportation costs, particularly internally,” said Bower, who estimates the size of the crop at 57.9 million metric tons. “Fertilizer applications are down 21 percent from last year and could drop even lower.”
The reduction in acreage comes on the heels of high fuel prices over the last two to three months, “which has really curtailed expansion in the west central and north central regions. Some of the areas that are marginal in production will probably drop out as well,” Bower said.
The Brazilian situation “will keep the market on edge until we get into the January to February period when their crop is setting pods,” noted Bastings. “With the strength of world demand for protein, we need big crops from Brazil and Argentina, regardless of the size of our crop.”
In addition, the dollar/real exchange rate has begun to work against the Brazilians, according to Bastings. “A few years ago, it encouraged expansion. Now it's going the other direction and that is also playing into the reduction in acreage we're anticipating.
“On the other hand, Argentina is expected to increase acreage, which may offset some of the decrease in Brazil.”
Another factor to keep an eye on longer term is the increasing flow of capital into the commodity markets over the last four to five years. “We've seen breakouts in copper and silver. Gold is at an 18-year high today. Coffee and sugar is moving,” Bower said.
As a result, “we see some of these commodities breaking out of their technical trading range. This indicates global demand. The soybean and corn markets are now going to take a different tone to see if this capital investment in raw materials will continue in the grain sector.
“As we know, $1.74 for cash corn is a great buy for an end user worldwide. Not many producers can grow corn for that without a subsidized payment. I think we're going to see some interest from foreign buyers, particularly for corn. I'm bullish on corn.”
Of course, there is still the issue of when New Orleans area ports damaged by Hurricane Katrina will begin to operate at full capacity again. “The transportation system is stressed. But over time, things will improve. For the farmer, that will mean an improvement in the basis, then some demand interest,” Bastings said.
Complicating the situation are new highs for barge freight and the premium for storage in the Midwest, where some corn is being stored on the ground. According to Bower, many states “carried in a lot of corn from last year's bumper harvest and are now harvesting what could be record crops this year. We'll get through it, but there are going to be challenges.”
Bower urged corn producers not to let large LDPs for corn slip out of their hands. “The LDP payment for corn has gotten out to historically wide levels — 44 cents to 50 cents in many areas. That is a huge amount of money for any corn operation. But when demand starts to creep back in or bad weather sets in, these LDP payments could start to dwindle.”
Don't let your LDP payment slip away, he urges. “There are ways to protect it, and you should do everything in your power to do so. It is such a huge source of revenue for the U.S. producer. With input costs next year expected to run well above this year, you're going to need every penny you can get for next year's crop.”