Which Way for Yields and Production Now?
Fundamental analysis is complex, with many pieces and lack of measurement of some key components such as feed use. Right now, futures traders are focused on yields. "Record-high nighttime lows in 37 states this summer support lower corn yields," notes Dan Manternach of Doane’s Agricultural Report.
We asked a few of the advisers we track for their expectations. Richard Brock of the Brock Report offers three scenarios (his "best guess" is in the table below):
• If corn yields fall to 159 bu./acre, carryover slips to 885 million bushels and farm prices run $4.50 to $5.50.
• At USDA’s 162.5 bu., farm price is $4 to $4.75; for 164 bu., stocks rise to 1.38 billion and prices drop to $3.75 to $4.25.
• Soybeans yielding 44 bu./acre would mean stocks under 300 million and prices in the $9.50 to $11 range; 44.7 bu., $9 to $10.50; strong yields of 45.5 bu. take stocks to 416 million and prices $8.50 to $9.75.
Jerry Gulke of the Gulke Group expects final corn yields to slip to 161 bu./acre and 2010 planted acreage numbers to be revised downward 500,000 acres due to prevented plantings. Given his usage figures, 2010 ending stocks drop to 842 million. He doubts USDA will ever print a carry-out under 1 billion; it would instead revise usage, implying prices will rise to keep carry-out adequate.
"We will need 2 million to 4 million more acres next year; 3 million could happen if bean carryover stays above 300 million bushels," he says.
Bryan Doherty of Top Farmer Intelligence is using a 161 bu./acre corn yield. "Yield less than 160 bu. or carry-out under 800 drives prices to $6 to ration supply and buy acres for next year," he says.
Producers need to be prepared for just about anything, Doherty says. "What if prices go up a little, or a lot? What if prices drop a
little, or a lot? Scenario planning helps manage for volatility." —Linda H. Smith
Excitement over Russia’s Drought is Waning
There is no denying Russia’s record heat wave helped U.S. producers through stronger than expected exports and prices. But the old adage "buy the rumor, sell the fact" likely applies here. With harvest well along, the fact is that despite shortfalls in Russia and several other important areas, world wheat supplies are ample.
USDA added 50 million bushels to U.S. wheat exports in September, reflecting reduced foreign supplies and increased global demand. U.S. corn exports are pegged at 2.1 billion versus 1.98 billion last year.
However, ending stocks for 2010/11, lowered by the same amount, are projected at 902 million—still the second highest in more than a decade.
World coarse grain production also is down and global trade is up, with the EU-27 and Russia importing more. Attention now will turn to fall wheat seedings. "Russian authorities suggest that winter wheat crop plantings are likely to be as large as last year, but sowing progress is behind that of 2009 and will be highly dependent on rainfall," says Wayne Gordon, senior commodity analyst at Rabobank.
In the U.S., Jerry Gulke of the Gulke Group expects a 4-million-acre rebound in 2011 wheat acres, to 58 million. That’s still below 2007, 2008 and 2009, however. —Linda H. Smith
Fertilizer Pricing Headaches
Prices for diammonium phosphate (DAP) have hit their highest level since November 2008, reaching $500 to $520/metric ton, reports Wayne Gordon, senior analyst at Rabobank. "Strong demand from Europe, the U.S. and South America, as well as further tightening of inventories, have supported prices," he says. Near-term prices are expected to edge higher, he adds. "But by the end of the year, prices should have moderated somewhat as supply starts to catch up and demand eases."
Urea prices also have firmed from their midyear trough, and some growers are unable to book spring deliveries. Overall, natural gas prices should not contribute to an increase in nitrogen fertilizer, says market analyst Jim Wyckoff. "The bears have the solid overall near-term technical advantage.
A 2½-month-old downtrend is still in place on the daily bar chart. The next downside price objective is a close below solid technical support at $3.50." A close above solid technical resistance at $4.20 would feed the bulls, but they first must make it through resistance at $3.95 and $4, he says.
Gordon adds that "urea producers in Ukraine have the potential to open up capacity that is sitting idle, but high natural gas prices there have kept producer margins tight despite rising product prices." —Linda H. Smith
Look at Options when Volatility Is Low
The best vehicle for protecting prices depends on a variety of factors. Soybean options’ volatility has been at or near an all-time low despite historically high prices, making premiums relatively cheap, says Justin Kelly of EHedger. "The conjecture behind the low volatility is that the Chinese importers are selling soybean put options when they make a purchase. U.S. producers can use this opportunity to purchase relatively inexpensive downside protection," he says.—Linda H. Smith
Key Market Factors
> Eyes turn to South American soybean prospects and the effects of La Niña.
> Exports must continue strong.
> Corn storage more promising than soybeans.
> Russian harvest nearing completion; less concern over drought there.
Top Producer, October 2010