On Feb. 9, the USDA released new commodity numbers. Of particular interest to Scott Stiles were updated carryover figures for the major commodities at the end of the 2006 marketing year.
“The 2006-07 marketing year for corn ends Aug. 31 and (USDA says) corn carryover will be 752 million bushels,” the Arkansas Extension economist said at the Multi-County Feed Grain Meeting in Brinkley, Ark. “That's important because 752 million bushels may sound like a lot. But when you look at how much corn we're using currently, that number is about a three-week supply.”
The concern is whether such a low carryover can bridge the gap between the end of the marketing year and when the new crop begins coming out of fields in sizable quantities.
“A 752 million bushel carryover is not a big carryover.”
As for soybeans, “the USDA increased the carryover for soybeans just a bit to a record-high level. Still, soybean prices are finding support due to a potentially dramatic acreage shift in 2007. There are many estimates on how many soybean acres we may lose.”
While the USDA left wheat numbers unchanged, the “big killer” was its cotton numbers. It increased the cotton carryover 1.2 million bales due to a lack of brisk export sales to China.
“There has been good competition for that market and exports just aren't moving like they did last year.
And the markets were quick to respond to the new figures. The opening calls on Feb. 9 showed “corn opened 5 to 7 cents higher. There were bullish numbers for corn and wheat and bearish, or neutral, numbers for soybeans.”
Stiles believes July 2007 wheat is locked in a 48 cent range.
“The bottom line is the demand has slowed for soft red wheat and has kept it from going back to the $5 level.”
From time to time, there are claims that if wheat looks questionable, “folks may terminate it and plant spring crops. That's why new crop wheat can't detach itself very much from the grain complex.”
If wheat prices were to plunge below $4, “people would begin to work their pencils and say, ‘I may need to terminate this crop and plant $8 soybeans.’”
How much corn will be planted in the United States in 2007?
In late January, “Informa Economics said corn acreage would be up a little over 7 million acres. Meanwhile (in early February), Pro Farmer surveyed of its subscribers and came up with 90 million acres of corn. That's the number everyone seemed to have in the back of their minds, but no one really wanted to verbalize. However, the market hasn't reacted to that estimate.”
What's really bullish for soybeans “is if we end up with 67 million acres that takes our carryover in 18 months from the current record highs to about 200 million bushels. If you're a soybean farmer, that scenario is exactly what you want.”
Stiles expects to see 8 million to 9 million acres shift from soybeans to corn.
“Many think cotton acreage will drop 3 million in 2007. Taking in the full range of estimates, the drop could be anywhere from 2 million to 4 million acres. I think 3 million is the most realistic. And probably 500,000 acres of ground normally in spring wheat will shift to corn.”
There are also rumors about early “out” options for CRP land. It doesn't appear that will be a factor for 2007.
On Feb. 7, USDA secretary Mike Johanns said, “‘We should have a decision by early summer. If some acreage is allowed out of the CRP, it wouldn't go into production until 2008. And there will be no general signups for that program in 2007-08.’”
At any rate, contracts on about 4 million CRP acres will expire in 2007 and 2008. It is estimated only 500,000 acres of that in the Midwest could be considered solid corn and/or soybean acreage. So CRP acres probably won't be a major issue, said Stiles.
“Generally, in the past, about 85 percent of the CRP land goes right back into the program. There's a reason it's in the program in the first place.”
September corn “has knocked along sideways” since the new 752 million carryover number was released. The market went up 40 cents in two days. But ever since, it's held court.
“That's indicative of a market looking for news — it needs a course heading. What that market is waiting on is the March 30 acreage report. When we get that number — a definitive number from USDA — that will set the course for the corn market for better, or worse.
“Informa's numbers came from using 8.7 percent abandonment. Plug in 85.6 million acres times (an average yield of) 154 bushels and production won't meet total use. There's a little over 12 billion bushels of production and use is projected at over 12.2 billion. You can't build carryover if production doesn't meet use. In that scenario, what we end up with is a 503 million bushel carryover — less than a two week supply of corn.”
And 8.7 percent abandonment isn't typical, warned Stiles.
“Average abandonment is 9.5 percent. Generally, about two-thirds of corn abandonment is corn cut for silage. With high corn prices, the theory is there won't be as much corn cut for silage.”
One estimate from University of Illinois economists indicates there will be 88.4 million corn acres. That will build carryover to just over a four week supply — still very tight.
The only thing that might put a lid on corn prices is acreage of 90 million-plus. But there's a huge amount of uncertainty “as to whether we can have an average yield of 154 bushels. That will be hard to do when perhaps 8 million to 9 million acres of the expansion will be corn behind corn.
“Folks in the north say the yields won't be as good in that situation. Corn behind corn may experience a 10- to 20-bushel per acre yield lag. And if we have 500,000 acres of corn that normally is in spring wheat, that acreage may not deliver top corn yields either.”
There's also some debate about what sort of weather pattern the Corn Belt will be facing. While few subsoil moisture concerns remain after a recent wet spell, “we've been in what's termed a ‘moderate El Niño’ winter. Yesterday, news came out saying we're in a weakening El Niño. Historically, when the El Niño weakens by March, there have been dry summers.”
Stiles recommended producers update cost of production sums. Since the end of August, urea prices have gone up as much as $140 per ton.
“The breakeven price you figured for corn three months ago isn't the same today.”
How much corn should producers forward price?
“That's a good question and it depends on who you ask. Academics say you need to get pretty aggressive. The reason is academics like to look at historic prices — we don't feel so comfortable making predictions. Some Extension economists are willing to (suggest booking) 35 percent before the March 30 report at the current price levels.”
However, when talking to private market advisors, “most are more confident in predicting prices. And for the most part they haven't urged growers to be aggressive yet. But a lot of them are suggesting forward pricing 10 percent of your crop.”
As for energy prices, there seems to be resistance at $60 per barrel for crude oil. Inventories for all fuel types are currently above their five-year averages.
“We're well-supplied. But if OPEC would abide by its own cuts, the oil price would be above $60. But there's been a fair amount of cheating going on in the cartel — the members agree to production cuts and then won't abide by them — so production has held up fairly well.”
The most volatile thing for crude oil is the same thing that's created volatility over the past few years: instability in the Middle East and countries such as Nigeria and Venezuela.