April 10, 2007

 

US economists say corn prices also pushing up grains
 

 

The continuous uptrend on corn have also lifted soybean and wheat prices to higher levels as grain markets have also rallied since harvest began last fall.

 

The perk began when traders realised the corn crop would be about 11 percent less than projected demand, the largest shortfall since 1988, say George Shumaker and Nathan Smith, agricultural economists from the University in Georgia, in their 2007 Grain and Soybean Market Situation and Outlook.

 

Smith and Shumaker note that corn prices have soared to more than US$4 per bushel--the highest level since 1996--speculative trading also contributed to the price rally as traders have invested largely in commodity futures in the wake of the biofuel phenomenon.

 

High corn prices, however, are adversely affecting the US livestock industry, the economists noted, as poultry

production is seen to decline by about 5 percent during 2007 and hog producers likely will slow production as well.

 

The report also said the cattle industry, by its longer production horizon, cannot respond as rapidly but it is certain to see a slow down in heifers and increased cow slaughter. This situation will indicate more beef on the market now but lower near-term prices.

 

Soybean and wheat markets have continued to move higher, say Shumaker and Smith, as these two commodities try to remain competitive in the race for 2007 crop acreage despite much easier supply/demand balance sheets.

 

The economists said in addition to the crop shortfall, demand for corn has soared in recent years due to bigger US livestock herd, strong export demand and the dramatic increase in ethanol production.

 

Corn used for ethanol production has grown from about 600million bushels in 2000 to about 2.14 billion bushels for 2006 and is expected to increase by another 535 million bushels during the first three quarters of 2007.

 

Corn production, they say, will significantly expand in 2007--about 89 million acres or about 10.5 million more than 2006--and may hold onto acreage gains for some time to come. The report also noted more acres will dismiss soybean and wheat as it plantings could drop by six million acres and two million acres, respectively. 

 

Shumaker and Smith noted demand remains strong for soybean meal to feed livestock, but it will dwindle during 2007 due to herd reductions. The exports will also be strong to date but will likely weaken as the South American harvest begins in late March.

 

In total, the economists emphasised soybean use will be record large but soybean ending stocks also will be at record level as growers begin to plantation this spring. However, soybean prices will be propped up by the competition for acreage from corn.

 

The wheat market, on the other hand, will remain weak as the loss of grain handling and storage capacity has limited marketing alternatives. Local basis levels are historically wide, said the economists, signalling a weak market for wheat. Growers with long-term relationships with end users still can sell wheat at near futures market price levels, but new producers may be scrambling to find handlers and acceptable price alternatives in 2007.

 

While Georgia-seeded wheat acreage has increased for the 2007 crop year, it remains to be seen how much of that acreage will be carried to harvest, say Shumaker and Smith.

 

The strong rally in corn prices, said the report, has some growers mulling whether to continue with the wheat crop or to plow it under and plant corn. Given the strong cash corn markets and weak cash wheat markets, the option is a good to consider especially for corn marketer.