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Corn+Soybean Digest

Yield, Not Acreage, Holds Price Key

Fundamental analysis forecasts ending stocks

Will high-priced fertilizer and fuel increase soybean acreage while corn acreage falls dramatically? I've read projections this winter of $3 corn and $3 soybeans. Never have I seen such huge swings in acreage projections for U.S. corn and soybean farmers.

Remember that everything you read is just a projection. No one will really know how many acres of corn and soybeans are planted until the dust settles at the end of June.

Now, before the planters pull out, I want to explain the basics of fundamental analysis. I'll also lay out my own forecasts to show you why the nationwide average yield — bushels harvested per acre — will have a much larger impact on price than will the number of acres planted to corn and beans.

Fundamental analysis is an attempt to forecast ending stocks and the price that will result. The first step is projecting the supply (harvested acreage x yield per acre). The second step is projecting how much will be used (exports + crush + seed and residual). The final step is to compute ending stocks. This is done by adding beginning inventory onto the production for the total supply, then deducting the estimated amount used.

As you can see, projecting ending stocks with all of the variables is like trying to hit three moving targets at the same time with a single-shot rifle. I use fundamental analysis not only to project ending stocks, but also to look at how different yield scenarios will affect ending stocks and the prices that will then develop.

Understanding that yield is more important than acreage is the key to analyzing soybean supply-demand alternatives for this year. The early trade estimate is that planted soybean acreage will increase by 2-3 million this spring. In the NorthStar 2001 soybean supply-demand scenarios, we're projecting that planted acreage will increase by 2 million. However, that number may be bigger or smaller, depending mainly on spring weather. An early, dry spring always results in more corn acreage while a late, wet spring increases soybean acreage (see “Reading Weather Road Signs,” page 16).

A 2-million-acre increase in soybean plantings will most likely result in about an 80-million-bushel increase in soybean production. If soybean plantings increase by 2 million acres and the average yield drops to 37 bu/acre, production will be virtually unchanged from last year and ending stocks will be relatively unchanged. If the average yield drops to 35 bu/acre, production drops by 150 million bushels and ending stocks drop dramatically.

That's why we emphasize that yields per acre are more important than planted acreage forecasts when looking at next year's ending stocks and the price outlook for old- and new-crop sales this spring and summer.

In its most recent Supply-Demand report, USDA changed its ending stocks projection. But NorthStar is sticking with the 295 million-bushel figure projected earlier. Declining ending stocks, coupled with record global usage of soybeans and oilseeds, make getting a large soybean crop in 2001 very important.

As the table on page 58 shows, it will take a trend-line yield (39 bu/acre) or better for any major increase in ending stocks to develop this year. If acreage is up and yields come in at 37 bu/acre or less, ending stocks will drop. A national average yield of 35 bu/acre or less will take ending stocks down to 250 million bushels or less. The large crop in South America and projections for a large increase in U.S. soybean acreage are already built into the soybean market.

If these projections prove true, soybeans will stay in a sideways-to-lower trading channel. However, with the current record base of demand, any production shortfalls could lead to a volatile rally in soybean prices.

How much will corn acreage fall and where will the cutbacks occur?

The early NorthStar projection calls for a 2-million-acre drop in planted acreage this spring. That drop, combined with a 140-bu/acre national average yield, would result in a U.S. corn crop of over 9.8 billion bushels. A 5-bu/acre lower yield takes production down to 9.5 billion bushels and ending stocks down to just over 1.6 billion bushels. A below average yield of 130 bu/acre takes production down to about 9 billion bushels; ending stocks drop to 1.2 billion bushels. This would set up the potential for $3 corn futures.

With the U.S. so dominant in corn production, prices would need to go higher to allocate supplies. While $3 corn futures may seem appealing in the short term, if you pencil in a smaller yield on your farm and no LDP, higher prices may not be all that good for your bottom line.

Corn ending stocks were estimated at over 1.9 billion bushels last year and would be almost unchanged this year with a 140-bu/acre yield. If average yield drops to 135 bu/acre or less, ending stocks would likely decline for the third consecutive year. At 130 bu/acre, ending stocks are now projected at 1.2 billion bushels. Corn has a huge number of variables coming into this spring — acreage and yield per acre being two of the most important.

Other key questions: How much will farmers cut back on fertilizer usage and will China get into the World Trade Organization and stop subsidized exports in competition with the U.S? It's going to be an interesting year!

Final thought: In the 20+ years I've written about and traded corn and soybeans, I've continued to gain more respect for Mother Nature. Spring weather will have a huge impact on the final planted acreage of corn and soybeans. An early spring will result in more corn acres than are currently forecast, and a late, wet spring will increase soybean acreage.

An early spring almost always results in trend-line or better corn and soybean yields while a late spring almost always hurts the yield potential of both crops. It's very unlikely that planting will be as early this year as in the last two seasons.

In April and May, prices will heat up and the market will become concerned with the “toos.” That is, it'll get too wet, too cold, too hot or too dry. It's too early for those problems yet — but they will come.

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