Will Bigger Supply Drive Prices Lower to Increase Demand?
Aug 12, 2009
Today’s USDA Supply and Demand report held a few surprises for me. First, in regards to corn, I really thought acres would be revised down from 87 million acres but they left them alone. Second, while I believe the crop is good, increasing the crop to 159.5 bu./acre before the potential September frost scare time period I thought was very aggressive on the USDA part.
However, this is not where I believe the biggest liberty was taken by the USDA staff to balance out the numbers. While production was increased 420 million bushels from the July estimate, they also increased usage by 350 million bushels. Specifically, feed usage is up 100 million bushels when dairy, pork, cattle and poultry herds are being liquidated, go figure. Second, the increased industrial usage, I give you that one along with exports up 50 million bushels. The other demand prospect that really bothers me is ethanol usage up 100 million bushels to 4.2 billion bushels. Great if they can get it, but boy does this conflict with what I’m reading about the distressed state of the ethanol production industry.
In summary: Bigger supply is going to drive prices lower to increase demand. Take advantage of any bounce into September on concerns about weather to sell the carry in corn.
For soybeans the report must be considered positive. They did not increase acres as much as anticipated and lowered yield to expectation. This resulted with a modest reduction in usage to reduce carryover projections from a potentially stressful level of 250 million bushesl to potential be tight at 210 million bushels. While the market did not initially bounce because much of the numbers were factored in, it does set the stage for beans to get "wild" if any further drop in yield is seen due to poor September crop production prospects. For this reason I have to suggest all producers should change the form of their selling position if cash flow is a problem. I would much rather be making new sells as long puts right now rather than short futures. I would suggest such a bias until we get into the first part of September. There will be tipping point but I would expect it will not be until after the September USDA Supply and Demand report that I would be comfortable being net short futures vs long puts.
As for wheat, I saw little to inspire me. Domestic carryover was increased 37 million bushels while world stocks were increased as well. The strategy of rolling all short futures forward to capture carry is proving to be the correct one. The only positive I can see developing is prices are so weak that little incentive will be given to plant if corn or beans is an alternative. Eventually, we will see the economic forces lower production and increase usage. The problem is it’s just going to take time when unfortunately we need higher prices for producers to economically survive.
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