Published: November 20, 2007 03:03 pm            

Ag consultants weigh in on ’08 grain acre battle

Originally published in the November 16, 2007, print edition.

Folks who make their living giving advice on crop production and marketing agree on at least one significant factor as farmers wrap up their 2007 harvest season: There is indeed a turf war under way in middle America.

“The input structure for corn, prices of soybeans and wheat, and the historic opportunities to forward contract will keep the acreage debate lively for months to come,” said Bryan Doherty, senior market adviser for Stewart-Peterson Agricultural Commodity Consultants of West Bend, Wis.

“We already are in a tug of war between corn, soybeans and wheat for 2008 acres,” said David Scheibel, with Market Wise Ag Services at Bird Island. “For example soybean futures Sept. 27 came very close to several Chicago Board of Trade futures contract highs with Nov. ’07 at $10.17 1/2, the second highest November soybean futures in history, and March ’08 setting a new all-time high of $10.41 1/2.

“The same day December corn futures for 2008, 2009 and 2010 all traded at $4.27, only $0.06 off the December CBOT record of $4.33 set this past June 14 and $0.38 above the 1996 high mark of $3.89 which farmers often reference as a historic benchmark.”

With “turf wars” already under way, what is likely to happen to corn acres for 2008?

Doherty indicated that based on current prices of new-crop beans and wheat, he would not be surprised to see corn acreage decline 5 million to 8 million acres next year. “Planted acreage could be as low as 86 million,” he said.

Scheibel agreed, even boosting the possible decline up to 9 million acres. “Many farmers are disgusted with their corn-on-corn acres this year. And corn production costs, especially fertilizer, are going to be higher again next year. However, producers who have learned to manage corn-corn will likely stay with some corn-on-corn.”

More beans and wheat?

In view of this scenario, both consultants predict significant expansion of soybean and wheat acres.

“A continued projected decline in both U.S. and world ending stocks for beans and 30-year low tight stocks usage figures for wheat suggest that not only in the United States but elsewhere in the world, acreage will be up for both crops,” Doherty said.

Scheibel cautioned, “There are many producers looking at wheat for the first time, thinking it can be a good alternative for rotation purposes. But since wheat yields can be highly variable from year to year, some producers may be disappointed at harvest next summer.”

Won’t export demand and the increasing ethanol production appetite continue to support corn markets?

Doherty noted that 2007-08 corn carryout is projected at close to 2 billion bushels and exports may see room to move upward. “But the ethanol industry has seen a 200 million bushel decline in usage between the last two U.S. Department of Agriculture reports plus the USDA is cutting feed usage,” he said. “Therefore any decline in carryout will likely come from increased export activity because of the cheaper U.S. dollar which makes U.S. corn today relatively cheap compared to levels five and six years ago.”

“The ethanol industry is currently experiencing the whip saw in production and prices,” Scheibel said, “since production has exploded past the infrastructure to handle all the volume. I would expect corn for ethanol usage to be in line, or lower, than USDA predictions since many plants are moderating production to try to stay financially viable. Negative margins are likely for many producers during parts of the next year.”

Back to normal rotation

If beans continue their strong market outlook, might they recapture the acreage they lost to corn this year?

Doherty thinks so, indicating many producers are talking about being back to their normal crop rotation next year. He also sees an increase in wheat acres in the southern Corn Belt with double-cropped soybeans as a likely scenario.

Scheibel cautioned that growing beans-on-beans doesn’t work nearly as well as corn-on-corn, so a complete shift back to soybeans is unlikely or we run out of corn. “However, we do need more than a 5-million-acre increase in beans or carryouts for the 2008-09 crop could be extremely tight.”

How much of an “unknown” for 2008 is wheat?

Most expectations are for a substantial increase in wheat acres, both in the United States and worldwide. High prices in commodities generally cure high prices through increased production and decreasing demand, Doherty pointed out, adding, “the world has suffered two mediocre crops in a row, with Australia suffering three disastrous years and still in severe drought. If, however, normal crop conditions exist in the year ahead, wheat prices will likely lose $1 to $2 per bushel.”

If drought conditions persist in Australia and South America, soybeans will likely be the bigger benefactor here in the United States. If South America cannot come through with a significant crop, Doherty predicts the bean market to ration inventory by making a move upward from current price levels.

Scheibel thinks it’s too early to make predictions since farmers don’t yet have a clear idea for those swing acres. “Maybe it’s easier to consider the likely loser come next fall could be wheat,” he said, “since wheat could be a first-time crop experience for many. I’d be protecting the wheat crop for next year with sales if I planned to grow wheat.”

Lock-in 2008 production

So with strong commodity markets pretty much across the board for 2008 crops, should producers be locking in a certain amount of their planned 2008 production? “Yes,” said both consultants.

“Prices are historically too high to ignore,” Doherty said. “Trends remain high and while it is tempting to try to allow prices to move upward, we also acknowledge that if and when prices top, they can make violent moves downward.” He encouraged being 25 percent to 50 percent forward sold in the winter months.

Scheibel’s strategy is to protect crop revenue by pricing about one-third of anticipated production using hedge-to-arrive contracts, and another third protected using put options.

“This position provides for profits even if the last one-third would be price at loan rate, something we don’t expect to happen,” he said. “The risks of unknown market factors are just too great for producers to gamble and go it open on next year’s entire crop.”

Should farmers buy early when it comes to 2008 seed needs? Scheibel’s response is probably what you’d expect from most ag consultants: “Buy early and hope you get what you want, is safer than waiting and learning that you can’t get what you want. If a ‘deal’ on prices is later offered you can always ask for the adjustment and I would expect that you would be accommodated. The seed industry is still very competitive when it comes to market share.”

“It is best to plan ahead,” Doherty said. “If inventory of seed becomes tight and you decide not to plant your crop, you will likely have a market to sell your seed.”

CRP wildcard

Perhaps the bigger uncertainty of this turf war is the federal Conservation Reserve Program. Approximately 2.5 million acres of CRP contracts are up for renewal right now (Oct. 1 release date) from the 36 million CRP acres nationwide. Today, fueled by soaring crop prices and land values, hundreds of thousands of these CRP grasslands are being plowed under and converted back to cropland.

With CRP having helped clean the nation’s waterways and done wonders in restoring habitat for pheasants, waterfowl and other wildlife populations, acreage losses could be devastating unless the new farm bill locks in restrictions.

For example, Minnesota lost about 80,000 acres of CRP on Oct. 1 including 40,000 acres in the state’s pheasant range. It could lose an additional 270,000 acres by 2010.

        

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