Drought Effects Far From Over

November 9, 2012 04:18 AM

Incredibly tight soybean and corn stocks and desperately short soil moistures means the effects of the 2012 will be felt well into next year—and perhaps beyond.

There is little price relief for dairy and livestock producers near term, says Chip Flory, editor/publisher of Pro Farmer newsletter. Flory spoke at Dairy Today’s Elite Producer Business Conference in Las Vegas this week.

“Domestic U.S. soybean carryover is very tight, but globally stocks are expected to be up some 55 million metric tons, which is equal to the entire Argentine crop,” says Flory. But China might start importing soybeans again as it works through some of its two- and three-year-old domestic inventory.

These older beans don’t crush very well, so the Chinese could be back into world markets looking for new supplies in the next few months. It also appears that the Chinese economy is starting to rebound, giving their buyers confidence that they will have market demand. As a result, says Flory, soybeans may have posted their post-harvest lows for the year.

The corn situation may be even worse, since the U.S. has unbelievably tight old-crop supplies. As important, the threat of drought is not over. Many areas of the Midwest need 12” to 16” of rain to recharge subsoil moistures. While some areas of eastern Iowa, for example, received 3 ½” of rain in October, that’s only a down payment on what’s needed to replenish soil moisture reserves.

Flory was encouraged by warming sea temperatures near the equator west of South America in October. This region of the Pacific Ocean is closely watched by climatologists because it often signals El Nino and La Nina weather patterns.

Warming seas (El Nino) mean more moisture evaporates into the atmosphere. That moisture is pushed over the Rockies and Andes Mountains, and drops out as rain east of these mountain ranges. However, in the last few weeks, ocean surface temperatures have again cooled, suggesting we’re still feeling the influence of the La Nina weather pattern that often foreshadows lower rainfall.

Flory is unwilling to predict what the U.S. Environmental Protection Agency will do with the renewable fuel mandate for ethanol. But he says even without the mandate, many ethanol producers will still produce it because oil companies are using ethanol as gasoline octane boosters.

Refiners have found it's more cost effective to refine gasoline to 83 to 84 octane and then use an ethanol spike to push octane to 87 for retail sale. Based on the octane value of ethanol, ethanol producers can still afford to pay $8.50 to $9/bu. for corn. That's keeping many ethanol plants in the market at current corn prices.

Another factor in the pricing matrix is that corn growers east of the Midwest are seeing reduced yields from planting corn after corn. That suggests growers will go back to more traditional corn/soybean rotations in 2013. And that could mean more soybean acres and fewer corn acres.

The bottom line: Soybeans could still average in the $12 to $13/bu range next year and corn is unlikely to fall much below $7/bu. For 2013-2014, cash corn could average between $6 and $6.50/bu base on a 3-million-acre range in corn plantings.

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