January 20, 2011

 

US crop dynamics favour corn prices over soy

 

US crop dynamics and an impending acreage battle both favour corn prices over soy values, according to a forecast of an "extended bull market" in the grain by a leading academic.

 

Soy buyers are already feeling the pinch from higher prices, Darrel Good, an agricultural economist from University of Illinois said, highlighting industry data showing an 11.5% tumble in US processing of the grain last month.

 

"Soy consumption has slowed much more than the approximately 4% needed" to ensure US inventories end the 2010-11 crop year at the 140 million bushels that officials predict.

 

"It appears that soy prices have increased enough to ration current supplies," Good said.

 

And as for increasing US soy production in 2011, this could be achieved by so-called double cropping, in which farmers follow up winter wheat harvests, which are undertaken relatively early, with a back-to-back soy crop reaped in the autumn.

 

"Doubled-cropped acreage of soy could increase by 2 million acres, following a similar decline last year," he added.

 

However, demand for corn had still not fallen enough to put the US on course to end 2010-11 with stocks of 745 million bushels, Good said, noting a 15% rise, on-year, in the recent pace of exports since the start of December, and 12% growth in consumption by ethanol plants.

 

The 6.5% growth in consumption witnessed so far in 2010-11 needed to slow to 1.2% to get supplies back on track, meaning that corn prices still had more work to do to deter buyers.

 

Furthermore, to rebuild stocks, corn needed to lay claim to just about all the 6 million US acres apparently going free for spring sowings. This acreage estimate was based on a return to 2008 planting levels, with an extra 3.7 million acres counted in, having been released from conservative projects.

 

Good said that "most of that 6 million acres should be planted to corn" if US inventories were to recover even to about 1.3 billion bushels next season - a figure still below average levels.

 

"Based on the need to reduce the pace of consumption and to aggressively expand acreage, corn prices likely need to remain high in absolute terms and relative to other crop prices for an extended period," Good added.

 

However, the conclusion contrasts with that of some other analysts, who believe that, with corn already the most profitable crop, it is soy which requires a stronger sowing signal through higher prices.

 

Darren Dohme at Illinois-based Powerline Group said that soy futures "will have to continue to trade to substantially higher levels to convince a farmer to switch from already very profitable corn projections for this coming spring."

 

"Why should I switch to soy when my corn profitability projects the highest it has ever been at pre-plant time?" he added.

 

"The soy market is going to have to outpace the corn and wheat rally by a 3:1 rally every day to finally convince me and any other corn farmer to go ahead and make the switch back to soy."