From the November 01, 2005 issue of Futures Magazine • Subscribe!

Large yields calling the shots

In a year that has forced the U.S. Senate to introduce a bill to offer federal payments to U.S. farmers hit by the drought, high gasoline prices and hurricane damage, you wouldn’t think we would be discussing large crop yields, but this is the inconsistent picture that 2005 has brought the grain industry.

William C. Fordham, owner and proprietor, C&S Grain Market Consulting writes in his newsletter, “Here in my own county [Bureau County, Ill.] within a 10-mile radius of the office, I personally know of corn yields as low as 50 and as high as 250 bushels per acre. Likewise in the same area, I personally know of soybean yields as low as 10 and as high as 80 bushels per acre...I do not know of another year when the variability has ever been as great as this year.”

So how could a year with such severe weather scenarios produce incredible crop yields in some areas of the country? Dan Cekander, grains analyst, Fimat USA, offers the following explanation, “Stressing the crop early in the growing cycle leads to a positive effect on yields,” he says, adding that the combination of early dryness, which may have stretched the crop’s maturity, and rainfall in August resulted in many plants showing quite remarkable yields.

Brian Rydlund, market analyst/principal with Country Hedging Inc., agrees that picture perfect weather in August definitely turned crops around. “Because of the August rains, the surprising yields shouldn’t be that surprising,” he says. In August, the country saw adequate moisture across the Corn Belt and the Great Plains, providing relief for some of the drought stricken areas of Illinois and Missouri.

BEANS GALORE

The adage for soybean farmers to not look at yields until August rang true this year. “Beans have a reputation as a miracle crop and in fact they did it again,” says Fordham, who explains that soybeans were able to perform well most likely due to a dry July inhibiting growth of disease and the crop capitalizing on rainfall in August.

On Sept. 12 the U.S. Department of Agriculture (USDA) predicted this year’s soybean production would reach 2.86 billion bushels. While down 9% from the record crop of 2004, analysts have high hopes for this year’s bean crop.

However, as for stockpiles, the market was given a bullish surprise in late September with the USDA’s quarterly Grain Stocks Report, pegging Sept. 1 soybean stocks at 255.5 million bushels, much lower than the previous year’s ending stocks estimate of 295 million bushels. Analysts’ estimates for the report predicted an average of 293 million bushels. “The lower-than-expected stocks figure was partly the result of strong usage as the USDA said soybean disappearance in the fourth quarter of 2004-05 was up 48% from a year earlier,” wrote Doug Harper, editor of The Brock Report. As for price, Harper says, “Soybeans will see quite a bit of downside in the near term.

We expect soybeans to rebound at the end of the year and move back to the $5.50 to $5.75 area.” Fordham, when interviewed in late September, had a similar outlook. He sees the stocks-to-use ratio up at around 11% this year and as a result forecasts beans at a low of $5.44 per bushel and a high of $5.95 throughout the rest of the year. Looking longer term, Fordham says because of the ever growing energy demand and soybeans being used for diesel fuel, the demand for U.S. soybeans will continue to increase. “Next year we will see greater soybean production in America,” he says.

SOUTH AMERICAN FACTOR

This year the USDA’s September crop report projected combined Brazil and Argentina’s soybean production to reach 189 million tons this season. While the Brazilian estimate represented a 2 million ton reduction since the last estimate, 60 million tons out of a total world projection of 216 million tons is quite a contribution. “Soybeans are truly a world market now. Each year we expect a lot out of South America and it is becoming less and less of an issue regarding what the United States grows,” says Rydlund. Harper agrees, “The long term trend with South American soybeans, especially Brazil, is definitely up. There is nothing out there that could really stop that.”

The last two years Brazil experienced unfortunate weather and smaller crops, and forecasts for this year’s Brazilian yields from analysts appear mixed. As of early fall the season was off to a rocky start. Brazilian bean production this year faces challenges from its own currency value. Trading at record levels, the Brazilian real made beans less competitive on the export market and farmers have struggled with high input costs. Also, high energy prices have raised fertilizer and transportation costs. In addition, soybeans in Brazil have been confronted with more and more competition from sugar cane production, leading to reports of decreased acreage due to the country’s growing demand for ethanol.

Nevertheless, like always, South American weather will be the wildcard providing the answers to yield uncertainty. “If South America gets normal weather this year the market may end up with as much production as last, or even possibly more,” Fordham says. However, Rydlund looks at the situation from a different perspective, explaining with acreage down and Brazil’s ongoing credit problems, the South American soybean crop may end up smaller than current projections.

But what about soybean demand? Analysts give general overviews such as “pretty good” and “good usage numbers.” U.S. export numbers match the explanations somewhat, with the U.S. soybean exports down 7% when comparing October to July 2004 numbers with the same time frame for 2005. However, whether China looks to the south for beans or comes to the United States is a major factor. “China is hopefully waiting for the right price on U.S. beans...waiting to see what they think may be the bottom price,” Rydlund says, explaining that China now regularly buys around 20 to 25 million bushels of soybeans. By year-end, Rydlund sees the nearby contract in U.S. soybeans to be trading around $5.25 to $5.75.

LESS CORN, MORE BEANS

A big concern for bean bulls is a possible shift in acres planted from corn to beans due to the escalating cost of corn production. According to Harper, U.S. corn might have 1 to 2 million acres less in 2006. Rydlund agrees, “Down the road I see less acres devoted to corn,” he says. For the current supply situation, corn is very well stocked. The USDA’s Sept. 30 stocks report shows corn stocks in all positions on Sept. 1 totaling 2.11 billion bushels, up 120% from Sept. 1, 2004.

If the USDA projection for the corn crop comes to fruition it will be the second largest production in history. “It is impossible to be bullish,” Harper says. In late September, he predicted seasonal lows some time in October and expects the market to work its way higher the rest of the year. By year-end he sees corn prices around $2.00 per bushel.

However, some analysts are not quite as bullish on yields as the government. “Many yields are just not there,” Fordham explains, “I just don’t think it is enough to break this thing wide open.” Fordham says he does not expect corn to see the record yields the crop experienced last year. He sees the stock-to-use ratio in corn reaching about 20%, leading to a forecast of $2.20 per bushel for a high and a low of around $2.00 for the year.

Other analysts provide similar forecasts. Cekander predicts that corn will see a low of $1.80 between October and December. And by the end of this year, Rydlund sees corn reaching $2.00 for the nearby futures contract. Both Rydlund and Harper expect Chinese demand for corn and soybeans to grow.

One dynamic growing in importance for corn is ethanol use. According to the Renewable Fuels Association, production of ethanol in 1990 reached 900 million gallons, but will grow to more than 4 billion gallons this year. Also, 20 new plants and three major expansions currently are under construction, resulting in the ethanol industry’s capacity exceeding 5 billion gallons in 2006 and more than 6 billion gallons in 2007. As for corn, this means growth in domestic processing occurring in the ethanol category.

NOT SO WILD WHEAT

Wheat does not have quite as an exciting story as soybeans or corn. “If you look at supply and demand for wheat around the world, things are a little tighter than a year ago and we have the potential to rally a little,” Rydlund says, but by the end of the year, Rydlund expects Chicago wheat futures to be $0.020 up or down from its early October levels around $3.40 per bushel.

Harper also sees wheat as range-bound and forecasts Chicago wheat within $3.25 to $3.40 by year-end.

While Cekander points to fairly tight worldwide stock numbers, he says there is bit of good news for the wheat market, explaining that the demand for hard wheat from Iraq and Nigeria earlier this year ended up larger than first expected. With fairly good exports and overall supply and demand being well balanced, Harper says, “I am not as worried about wheat as with corn or soybeans.”

In early fall, many wheat traders were focused on the Canadian western prairie where weather had downgraded much of the wheat to feed.

This year besides supply, demand and weather, the other pertinent variable is storage. In early October, when 2005 corn harvest had barely begun and the bean harvest was not yet complete, grain elevators already were preparing for ground piles thanks to large carryovers.

In addition, farmers were facing the expectation of huge crops to come, Hurricane Katrina’s wrath was slowing down barges and shipping, not to mention huge freight costs as a result of record oil prices. In many locations across the country analysts can point to instances where freight prices have even doubled, “We have seen examples where costs have been $0.40 to $0.50 a bushel over what anyone has ever paid for it,” says Cekander. This mix of circumstances basically turned what independently may have been transportation and storage problems into a full-blown crisis. And the further you travel west in the United States the worse storage problems become.

While many in early October forecasted the industry would work through the shipping roadblocks from Katrina, still 60% of all grains move from the United States to overseas through ports in Louisiana. Fordham notes that just because a barge opens doesn’t mean grain will automatically be moved. “There is tremendous demand for barges for other things beside just grains,” he says.

Reacting to the grains’ storage squeeze, the USDA in late September agreed to allow grain elevators and growers to store overflow grain in makeshift sites. “There is going to be an overflow of grains at harvest that doesn’t have a home,” Cekander says, adding that this overflow means that grains will still be bearish in November.

Carla M. Bauch is a freelance writer in Chicago.

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