April 8, 2009

A late start to spring has greatly enhanced prospects for new-crop prices for US grain growers, provided that the weather is favourable for planting.

"The cold, wet weather is delaying early planting but, in talking to different farmers, nobody is really worried about it yet - but they are talking about it," said Linn Group analyst Jim Riley.

End-users are becoming noticeably more worried, however, lifting new-crop basis premiums in an attempt to secure at least a minimal portion of their expected long-term needs on forward contract from farmers.

Enhanced basis bids for fall delivery have joined forces with a speculative futures rally to ratchet up prices offered for new-crop bushels by nearly 75 cents for soy, and more than 50 cents for spring wheat, during just the past week.

"The US is now in its first weather market of the year. Weather now becomes one of the primary fundamental factors in the grain market," said Iowa commodity trade adviser Karl Setzer. "It is not uncommon to see increased risk premium and market volatility at these times of the year."

Strangely, the average rise in new-crop prices tendered to growers over the past week - equal to about 8 percent for both soy and spring wheat - has been double that recorded for corn, which is the first major US spring crop to be actually planted annually.

New-crop corn basis bids at primary interior terminals have appreciated by an average of less than one cent per bushel during the past week - less than half the basis rally recorded for soy, which have a shorter growing season and actively compete with corn for the most productive Midwestern acreage.

Moreover, December CBOT corn futures have risen by just 18 1/2 cents during the period, resulting in a rise of only about four percent for new-crop prices, less than half the percentage price-rally enjoyed by 2009-crop soy/spring wheat.

One possible explanation is simply that US carryovers of wheat and corn are forecast to be four to 10 times as large as domestic soy surpluses by the end of the growing season.

"We also need to remember planting is only one factor in final yields," said Setzer. "For several years, we have seen delays to plantings and still harvested record crops, such as last year. This is taking away some of the support the market used to get from wet springs."

That underlying faith in US farmers might also extend to economists at the USDA, who sparked a return of cash soy prices to January highs by reporting on March 31 that producers would basically plant about the same amount of the oilseed this year, as they did last year. That forecast was initially criticised by industry analysts, who had collectively guessed that soy seedings would instead rise by 3.5 million acres.

"I really don't think the trade in Chicago appreciates the degradation in credit," offered Mike Zuzolo of Risk Management Commodities Inc. "Agricultural lines of credit are seeing much too high interest rates in our view, and it causes producers to become risk-averse. That suggests that marginal land won't get planted, because crop insurance won't be used due to expense and lack of credit."

The agency also forecast a one million-acre drop in 2009 plantings of corn.

"Corn prices must send a signal to producers to confidently embrace their corn acreage, as most believe current prices and current price relationships with soy will shrink final corn acreage from USDA's 84.986 million-acre projection," said analyst Duane Lowry. "If the current wet-weather theme continues, traders will very quickly begin to add price premium to corn values, possibly by a notable amount and in a swift manner."

Alaron market researcher Tim Hannagan points out that intended acreage, weather patterns and grain inventories seen in the spring of 2009 "are almost identical to last April."

"Yet July corn futures sit US$1.75 per bushel cheaper today than a year ago," he said. "Last April, we put a 50-cent weather premium into corn from April 1 to April 28 to factor in the excessive wetness."

Other market experts remain firmly bearish. In fact, some recommended Tuesday (Apr 7) that their farmer-customers sell most of their remaining corn and soy inventory.

"I love selling the 'it's too wet to plant anything' rallies in early April because it is almost always the right thing to do," said analyst John Roach. "Although you may be scared about getting your crops planted, US farmers always get the job done."