May 14, 2007

 

Corn to remain driver of US grain prices

 

 

Corn is going to remain the driver of US grain prices and outlook as ethanol demand is expected to spike for the current marketing year and ultimately will remain long-term supportive for corn.

 

On Friday the US Department of Agriculture released new production, supply and demand data for the 2007/08 marketing year. Among other changes, the government lifted the ethanol production estimate for the coming marketing year to 3.4 billion bushels, sharply above 2006/07's 2.150 billion figure.

 

The ethanol production figure was a "shot across the bow for the bears," said James Barnett, grain and oilseed at Man Global Research. "The carryout number for corn is less than expected and that's the relevant data for the market."

 

Ending stocks for the 2007/08 corn marketing year were 947 million bushels, under the 1.058 billion-bushel trade estimate.

 

Ending stocks for the 2006/07 corn marketing year were 937 million bushels, above the 878 million-bushel trade estimate and the April figure of 877 million.

 

In order to meet higher biofuel demand, US farmers are expected to produce 12.460 billion bushels of corn. That compares to 2006 output of 10.535 billion bushels.

 

Given the size of the new-crop production and demand, John Welsh, senior vice president at Peregrine Financial said cash corn prices will likely remain above the US$3 a bushel area.

 

Both Barnett and Welsh spoke at a Chicago Board of Trade press briefing following the USDA crop data.

 

Barnett said the recent price break in corn should be viewed as a buying opportunity as corn remains in a long-term bull market due to ethanol.

 

He said the ethanol production number is above what USDA released during its Agricultural Outlook Forum. "USDA had to raise its estimate just two months later," he said.

 

The USDA lowered the feed and export demand categories of corn to 5.7 billion and 1.975 billion, respectively. "That assumes price rationing of demand," he said.

 

Welsh said corn has attracted incredible speculative interest from both traditional and new users. Since open interest peaked in March, about 25 percent of those positions have been liquidated. "That's a big enough shake out to trade sideways," Welsh said. "I anticipated a trading range for corn, rather and a straight directional move."

 

CBOT corn prices have hovered just under US$4 a bushel and for farmers to respond to the strong demand from the ethanol industry, prices will need to remain stable, Welsh said. There is some industry concern that ethanol production is running into overcapacity, not all of the US gasoline supply contains ethanol, so there is room for growth without causing a glut, Barnett said.

 

Both Welsh and Barnett said the trade will likely trade this report for a short-time before returning to look at the weather situation. Both panelists also said they weren't concerned about the planting delays in the western corn belt as they believe farmers will get their corn planted. The weather will always remain important, but as Welsh said, "any weather scare will be in relation to the acreage size."

 

 

Soybeans

 

The USDA said the 2007/08 US soybean crop is estimated at 2.745 billion bushels in its first estimate of new crop production size. Output for 2006 was 3.188 billion.

 

Ending stocks for the 2007/08 soybean marketing year were 320 million bushels, under the 337 million-bushel trade estimate.

 

Ending stocks for the 2006/07 soybean marketing year were 610 million bushels, marginally above the 607 million-bushel trade estimate, but below and the April figure of 615 million.

 

"Soybeans are a market that just doesn't want to go down," Welsh said.

 

Barnett concurred, as the market is supported by the hopes for biodiesel production and lower acreage. Further, Brazilian production does not appear to be expanding, due in part to the strength of the real. Soybean trade is dollar-denominated, so Brazilian farmers earn less on soy production if the dollar is weak.

 

Friday's report was the first time USDA broke out the soyoil use for biodiesel by adding a category for methyl ester use. For 2007-08, methyl ester use is put at 3.8 billion pounds, a rise over 2006/07 usage of 2.550 billion pounds.

 

 

Wheat

 

All winter wheat production for the US was put at 1.616 billion bushels, above the average trade guess of 1.587 billion bushels. In drought-ravaged 2006, all winter production was 1.298 billion.

 

Hard red winter wheat production was 1.028 billion bushels, above the trade estimate of 974 million bushels and the 2006 output of 682 million bushels. Soft red winter wheat (SRW) production is seen at 346.7 million bushels, under the trade estimate of 368 million and under last year's level of 390 million. White winter wheat is estimated at 240.7 million bushels, in line with the trade estimate of 245 million bushels and above the 2006 production figure of 225 million.

 

Friday's data included the first production report from USDA following the early April freeze in the Plains. This estimate from USDA suggested the crop wasn't as badly damaged as first thought.

 

"Wheat's a weed," Welsh said, echoing a common trading adage about wheat. "We won't know what production is until it's harvested, but what we do know is there's enough to satisfy need at current price levels."

 

The smaller-than-expected SRW means that "we can't export a lot of it or feed it," Barnett said.

 

New-crop wheat ending stocks were at 469 million bushels, under the trade estimate of 500 million.

 

Old-crop wheat ending stocks were at 412 million bushels, under the trade estimate of 424 million, and lower than the April figure of 422 million.