30, 2007 -- The "Report of the Century," finally released,
began being discussed in earnest months ago because it would have major implications
for agriculture. After being released, grain prices collapsed and the report
was cussed loudly. First discussed. Then cussed. Though tiring, I would like
to offer some thoughts about the report and what it suggests for the grain complex
going into the growing season.
It was my view, the Report of the Century would hold a bullish surprise, sparking grain prices higher. The report did hold a bullish surprise for new crop soybean acres but not for new crop corn acres which was the focus of the marketplace. I thought the bullish surprise would be with ending corn stocks more than anything else including new crop corn acres. Even in the case of ending corn stocks, however, the numbers released were a tad bearish, which of course, caused me to cuss. And loudly I might add. The rest of report day I spent discussing the USDA figures. Apparently, farmers intend to plant 90.45 million acres of corn to take advantage of demand for corn based ethanol. It was expected that acreage would not exceed 88 million. Corn acreage of 90.45 million will be the largest since 1944 and the greatest rise in a 12 month period in more than 100 years. It is difficult to put a bullish spin on such figures!
But understand, the Report of the Century was a bullish surprise for soybeans as farmers intend to plant 8 million fewer acres, the smallest since 1996. Should soybean yields fall a meager one bushel per acre this season, prices of $9.50 to $10.50 a bushel are likely. A two bushel drop means, "beans in the teens."
The markets focus on report day was not soybean acres nor ending stocks for corn. It was new crop corn acres. When the trade saw a print of 90.45 million acres, prices across the grain complex melted. By settlement, corn was down at 20 cents/bushel while wheat and soybeans were off that much and more.
It is astounding, producers would shoot themselves in the foot so to speak when it comes to increasing corn acres. Since early October, new crop soybean prices through and including report day have outperformed new crop corn prices by $1.21 a bushel. Logic and economics suggested producers would hold tight to a normal crop rotation based on soybean prices compared to corn prices. Unfortunately, farmers were caught up in a whirlwind of speculation hoping to produce a crop fetching $5 a bushel. Now, they are staring at $3.75 a bushel corn and $5 a bushel is a far out of sight target.
If producers follow through with intentions to seed 90.45 million acres and a normal percentage is harvested and yields normal, a crop of 12,600 billion bushels will be realized. With perfect growing weather, corn prices should then hold in a trading range of $3.00 to $4.00 a bushel for the next 12 to 16 months.
Considering corn prices were $2.25 a bushel last September, a forecast of $3 to $4 a bushel should make producers happy. But there is a lot of cussing going on out of disappointment and disgust that prices are unlikely to be $5 a bushel because this year's corn acreage will be the largest in 63 years.
Let's stop cussing the corn market and start discussing this: How can producers get $5 a bushel corn rather than the $3 to $4 a bushel forecast above? It is simple. Avoid guessing where prices will be at harvest and plant no more acres to corn this season than last when acreage was 78.3 million. Or, no more than what was planted in 2005/06 when 81.8 million acres were seeded. Do that and prices will be $5 a bushel and more by Fall and for years to come. Years to come.
Another way $5 corn can be achieved is if soybean prices rise high enough. Should soybean prices rally to $9.50 to $10.50 on a one bushel drop in yields this season, corn prices should follow along for the ride and hit $4.75 to $5.25 a bushel. The ratio of soybeans to corn should hold near the 2:1 level.
Farmers may intend to plant a monstrous corn crop this season, but there is yet time for them to change their plans. Intending to plant and actually planting are two different things. With corn prices down nearly $1 a bushel in the past month and soybean prices holding up well in comparison, I am guessing that actual plantings will be less than 90.45 million acres for this year.
Logic and economics suggest a modest shift back to soybean seedings by final planting time. The die is not yet cast. Then again, maybe farmers are poised to shoot their other foot and cuss even louder than they did today, following the release of the Report of the Century.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)