September 26, 2008 03:09 am
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Editor’s Note: Tim Emslie, Country Hedging market analyst, is sitting in this week for Phyllis Nystrom, the regular “Grain Outlook” columnist.
The following market analysis is for the week ending Sept. 12.
CORN — A reduction in the U.S. Department of Agriculture’s yield estimate turned what had been a down week for the corn market into a higher week. Friday’s limit higher move resulted in the first weekly gain in three weeks for the December contract, up 14 3/4 cents.
The USDA lowered its estimate for the national yield to 152.3 bushels per acre from 155 in August by lowering the yield in all major producing states except Illinois due to late season dryness. The Illinois estimate was left unchanged, while the biggest drop was in Ohio, down 8 bu./acre.
These changes brought total production in at 12.072 billion bushels, slightly below the average trade guess. It was the first time since 1997 that the September production number was below the average trade guess. The USDA was probably a little more aggressive in reducing its yield estimate this year considering the last two years when final yield numbers were ultimately reduced about 5 bu./acre following the September estimate.
The projected ending stocks for the 2008-09 marketing year were lowered to 1.02 billion bushels. For comparison, at this time last year, the 2007-08 stocks were estimated at 1.675 billion bushels, and the current USDA estimate for 2007-08 is 1.576 billion.
Getting back to the 2008-09 estimates, feed usage is expected to accomplish the majority of the rationing, coming in down 14 percent from 2007-08. Increased distillers grain will offset part of the feed use since ethanol usage is seen up 1.1 billion, but it may be hard for $5.50 corn to achieve that kind of contraction in the livestock industry.
In the big picture, much of the price outlook will depend on how much room the ethanol producer has in his margin, which in turn depends on whether crude oil prices are $75 or $150. Currently, breakevens for ethanol producers would appear to be near $6, which could provide a cap to any current rally.
World corn stocks were reduced 2.5 million metric tons on the September report, mainly on a reduction in the U.S. stocks. The two notable world crop changes were in Argentina, which saw its expected production lowered 3 mmt due to dryness, and in China, whose crop was increased by 3 mmt.
OUTLOOK: The market is still focused on what this year’s yield will be. The lateness of the crop is adding some uncertainty, and the case can also be made that weather this year has given us some increased variability, making yield more difficult to estimate.
With the notable exception of Informa Economics, which reiterated its yield estimate of 156.5 following the USDA report, most analysts expect the final yield number to ultimately be lower than the September USDA estimate. This should make $6 to $6.25 a pre-harvest target for the market.
SOYBEANS — Soybeans were up 25 cents for the week after the USDA made a modest reduction in the national yield to 40 bu./acre.
Several major states saw yield reductions including Indiana, Ohio, Wisconsin, Nebraska and South Dakota. However, Illinois, Minnesota and Iowa yields were left unchanged. Looking ahead, it seems likely that Minnesota and Iowa yields could be reduced further, while Illinois yields could be a pleasant surprise after the remnants of Hurricane Gustav gave that state a timely drink right after Labor Day.
Delta soybean yields are expected to be lowered due to poor harvesting conditions. Putting it all together, it seems the bigger risk is for lower yields from the USDA going forward.
The 40 bu./acre production results in a carryout of 135 million bushels for 2008-09, just slightly lower than 2007-08s 140 million bushels. As we’ve seen from the domestic cash market recently, this essentially is the “pipeline” minimum, meaning there is limited room for additional demand.
In fact, the USDA cut the crush by 30 million bushels for 2008-09 (both from the previous month and the 2007-08 estimate), indicating that any additional production decreases will have to translate into lower usage as opposed to lower ending stocks.
World stocks were able to be increased slightly with an increase in Argentina’s crop of 1 mmt on increased plantings. Dry conditions there currently are seen as reducing corn plantings which will eventually be seeded into beans when moisture comes.
OUTLOOK: As with corn, harvest results will drive the market through the fall, with the best guess from here being a sub-40 national yield. Again, the exception to this outlook is Informa Economics, which says that the USDA is giving too much weight to the 2003 experience which saw similarly dry August conditions.
Informa is optimistic that good moisture entering August, the lack of heat, and better expertise in managing aphids will make this year’s results compare favorably. The U.S. balance sheet remains tight, however, as illustrated by the explosively higher expiration of the September contract.
Additional observations: The U.S. dollar index fell late in the week, apparently ending a two-month rally. There is some talk of an interest rate cut in the future. This may prove supportive of commodities if it pans out.
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Tim Emslie