This time around, it's soybean's turn to lead the commodities market. Last spring, as most recall, it was corn trying to find a price high enough to ensure adequate supply to satisfy demand.
Tim Hannagan, senior grain analyst at Alaron Trading, speaking at the Minneapolis Grain Exchange press briefing on the December crop production and world supply and demand estimates, noted that as corn futures rose, “We saw a 14 million-acre increase in corn plantings, and because of that, we have a 1.797 billion bushel carryover. But there is a very strong demand cycle out there.
“There is a new word in town, agflation, and it comes from the ability to convert corn and beans into fuel.”
One loser in corn's push for more acres was U.S. soybean acreage in 2007, a situation reflected in USDA's December estimate of world supply and demand, which lowered U.S. soybean ending stocks by 25 million bushels to 185 million bushels. World carryover is pegged at 47.32 million metric tons, down from 49.3 million metric tons.
U.S. exports were raised 25 million bushels while crush was raised 5 million bushels due to improved soybean meal exports.
“Last year, corn kept trying to find that $4.60 going into market, soybeans are now faced with the same situation,” Hannagan said. “This year, soybeans will be the leader. The function of the market is to ration the crop, and that means that we have to get between 7 million and 8 million more acres for soybeans.
“We're going to get some acres from crop rotation, but the rest is going to have to come from price increases.
“If we were to plant only 6 million more acres, with no change in demand, ending stocks on Sept. 1, 2009, would be slightly under 100 million bushels.
“So you can see the urgency that beans have and why beans are over $11. I would suspect that $12.75 on that March soybean contract before March expires would be a realistic objective.”
China is the big player in the market for both corn and soybeans, noted Hannagan. But he says China's current soybean purchases might imply “overbooking due to threats from an El Niño in South America. I would suspect into mid-January, if the rains are adequate the rest of the December and into January in Brazil and Argentina, I'll look for China to begin canceling orders so they can buy beans cheaper at South American ports. Either way, bean stocks will be drawn down in the world market.”
Hannagan believes corn prices are headed higher too, based on strong demand in the feed and fuel markets. “U.S. corn exports so far are running a little over 36 percent higher on the year.
“I would guess that corn could very easily test the $4.85 mark on the March contract. I wouldn't be surprised that the index funds buying and overbooking could push us over $5.
“I expect that after Jan. 1, we will see a large movement of corn to the market and a drop in cash prices, and possibly in the futures as well. The talk is that growers are holding a lot of cash sales back until after the first of the year to defer tax payments.”
While there has been talk of smaller margins for ethanol producers, Hannagan doesn't see a long-term slowdown in ethanol production.
“There are 134 ethanol plants in operation, 66 under construction, and 10 are expanding. The existing plants are going to produce 7.3 billion gallons of ethanol. It's the magic elixir of the future. It's not going away. The mandate is to expand ethanol production through 2012.
“We did see a little bit of a fallback in ethanol, when profit margins declined a little bit. People wanted to say that was the top, it's all over. Not so. In two years, 85 percent of Ford Motor Co. automobiles will be biofuel operated. It's a worldwide thing. This is why corn demand is not going away. Ethanol consumption is going to continue to increase and ethanol production needs to continue to increase. The ethanol we produce today won't even come close to meeting the needs two to three years from now.
“We're starting to level off on the construction of new plants because the private sector seems to have exhausted their money,” Hannagan said. “But look for agricultural-minded companies to expand in 2008-09. Demand is there, needs to be there and will expand.”