Market Outlook: Marketing Nail-Biter

July 26, 2011 09:25 PM

Corn’s bearish June 30 USDA Acreage and Grain Stocks reports leave economists in different camps on producer marketing strategies for the summer. Given the immediate and large price crash following the release of the reports, there is little incentive to price corn, says University of Illinois economist Darrel Good. In mid-July, he looked for December corn futures to trade between $6.25 and $7 per bushel, up from the $5.50 per bushel level following the reports.

"The fact that planted acreage exceeded March’s planting intentions was a shock. I wonder how we did that," Good says.

As important as USDA’s Acreage report was, even more important was its Grain Stocks report, which showed larger corn stocks than the trade expected. The report showed corn stocks down 15% from the year-ago total of 4.31 billion bushels, but above the projected 3.324 billion bushels.

As a result, all eyes will be on the September report. "Whether the September report shows
March 1 stocks of 1 billion bushels or 700 million bushels—that’s huge," Good says. Also, he says, by September, the impact of the summer on yield should be apparent.

At face value, these two reports mean a larger corn crop than the industry was expecting, says Chad Hart, Iowa State University ag economist. Nobody was looking for a crop potentially as large as the Acreage report says, he notes. "If growing conditions are right in July and August, there may be more downside risk."

Weather Will be Key. What the Acreage report suggests is that producers responded to the economics of corn versus soybeans even to a greater extent than the trade was expecting.

When corn prices were at $5.80 per bushel in early July, there was little incentive for producers to forward price, Hart says. The key reason: "Prices were below the price guarantees with crop insurance, so producers could be more conservative and give the market a chance to work," he explains.

Hart looks for a $6.63 per bushel average corn price for the year, due to a heat wave in the Midwest and strong demand.

Will China's Economy Hurt U.S. Exports?

While it may be an exaggeration to say that as goes China, so goes U.S. agriculture, the nation is a major commodity price factor. This is particularly true for soybeans, with China consuming roughly 25% of U.S. production.

china economyChina has been a big buyer at high commodity prices, and lower prices could make it an even larger buyer, says Bruce Scherr, CEO and chairman of Informa Economics. Scherr believes it’s not politically feasible for the Chinese government to reduce the import of food for its people.

Marc Curtis, chairman of the United Soybean Board, says that if growth of the Chinese economy slows down, it’s only to be expected that year-over-year increases in soybean demand will decrease. The Leland, Miss., producer stresses, however, that it’s only the rate of increase that may slow, and China will continue to be a large buyer of U.S. soybeans.

"China’s propensity to import largely depends on the level of world commodity prices," states Fred Gale, senior economist, China team, USDA’s Economic Research Service. The recent fall in U.S. corn prices seems to have stimulated interest among Chinese buyers, he adds.

Gale adds that this year, demand for soybeans and every commodity related to vegetable oil is strong. Pork prices are soaring due to a short supply of sows and pigs, which will stimulate a rebuilding of the swine herd, with ensuing effects on corn and soymeal demand.

"However, the Chinese commodity economy tends to run on momentum and can reverse quickly," Gale says.

China is trying to slow income growth because high growth rates are resulting in inflation of about 5% to 6% for average prices but 10% to 12% in food inflation, says Chris Hurt, Purdue University economist. "China is not likely to reduce its imports of food until it can cool its high food inflation rate," Hurt adds.

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