April 6, 2010 07:00 PM

USDA's 2010 Ag Outlook

This year will bring better prices for livestock, while those for grain and soybean crops will decline due to abundant crops, reports Joe Glauber, USDA's chief economist. However, price reaction will be moderate. "Five years ago, such large crops might have resulted in $2 corn, $3 wheat and $5 soybeans, but because of strong domestic and foreign demand, crop prices remain high relative to historical levels,” he says.

At this early date, USDA anticipates a record corn crop of 13.2 billion bushels, with 34% (4.5 billion bushels) going to the production of about 12 billion gallons of ethanol. Yet, ethanol demand is expected to be limited by recession-led reduced use of gasoline unless the Environmental Protection Agency increases the blending level. A decision could come this summer. Feed and residual use will total about 5.35 billion bushels, and exports about 2.1 billion bushels. The season-average price projection is $3.60 per bushel.

The U.S. soybean crop is estimated at 3.2 billion bushels, down slightly from this past year's 3.3 billion. Nearly 1.3 billion bushels will be exported. But lack of growth in the U.S. livestock sector, replacement of soybean oil with lower trans fat oils by food manufacturers and competition from South America will push the season-average price to $8.80 per bushel, down from this past year's $9.45.

U.S. wheat stocks will exceed 1.2 billion bushels for the 2010–11 crop year because of export competition around the world. So wheat's estimated season-average price is $4.90, almost $2 below the 2009 crop, making it competitive in the feedbunk. —Patricia Peak Klintberg

More Efficient Exports to Asia

The vast majority of North American grain and soybeans and South American agricultural exports to Asia travel through the Panama Canal. This past year, the Panamanian government announced a major expansion. As the name of the class of ship implies, the largest ships the Canal currently can handle are "Panamax” vessels, which hold about 2 million bushels. When the expansion is complete, the enlarged canal will be able to handle ships with capacity of about 5 million bushels, making trade with Asia more efficient. Turnaround time will be quicker, as well.

Despite many rumors circulating about foreign governments taking control of the project, the Panama Canal Authority is funding 100% of the $5.25 billion construction project, says Alberto Alemán, administrator of the Authority. Most of the project will be self-funded, but loans of $2.3 billion from multinational banks were secured for the construction project. —Greg Vincent

Weather and Protection

It's all about planting progress now, says Jerry Gulke of the Gulke Group. "I don't know about you, but I don't want to plant corn into the end of May or early June the way we did last year. We saw drying costs over $100 per acre, all kinds of toxins, low test weight, poor efficiency and poor storability. Our clients all over the country are telling us they are going to quit planting corn May 10. If that happens, we could see a price rally as users worry about supplies.”

Barring such concerns, it appears that by this fall, both the corn and soybean markets will have returned to where they were this past fall, Gulke cautions. "For soybeans, that's below $8. We have almost all of the 2010 crop priced. We bought some put spreads for soybeans on our last 20%. We've also begun to sell 2001 soybeans. If you haven't sold any 2010 corn, I would use rallies to price some. I'm not so concerned about 2011 corn until I see the June acreage report, but we've got a big crop coming worldwide, so with prices over $9, we locked in 20% and we'll lock in more on a rally,” he says. —Linda H. Smith

Some New-Crop Sales on the Books

Only a few of the market advisers we track have new-crop cash sales on the books (see chart), but any spring price strength might signal the time to make initial sales if you haven't already.

"I hope producers do have 25% or 35% of their crop sold,” says Bryan Doherty of Top Farmer Intelligence. "If so, I wouldn't be in a hurry to initiate cash sales, though I would buy $4 or $3.90 put options.” Consider selling July or December calls to offset part of the premium cost, he says.

"However, if you have no sales made, I'd be proactive and get some sold, hoping they'll prove to be the worst sales you make,” he adds. "It's easy to see how corn could range from $3 to $5, and we are in the middle of that range now.”

Bob Utterback notes, "We may get a slight price rally in April or May, but I think December 2010 corn is going to find it hard to get back to $4.15.” —Linda H. Smith

Key Market Factors
> Floods hit as snow melts, especially in Northern Plains
> China cancels U.S. bean orders
> Wheat takes on feedgrain status
> Watch where the acres wind up

Click here for the Adviser Track Records table (Percent Sold and Market Value on Feb. 2, 2010)

Money Goes Short

In mid-March, growing short positions owned by traders in the noncommercial category overshadowed their basically unchanged long positions, reports Luke Chandler, analyst for Rabobank in London. Noncommercials increased short positions by nearly 14,000 contracts in soybeans, 11,000 in soybean meal and 7,400 in corn. "Cotton was the only commodity whose net position increased—by 3,700 contracts. Its fundamentals remain supportive, encouraging speculative interest,” Chandler says. —Linda H. Smith

Top Producer, Spring 2010

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