Top Market Factors to Watch in 2010

February 3, 2010 06:00 PM

We know more about supplies now that USDA's January batch of reports are on the books, promising ample supplies of corn and beans and giving new life to livestock operations. However, there are still many unknowns. Here are the top factors to watch as you chart your sales course this year.

Volatility. The market open following USDA's Jan. 12 reports delivered a dose of what market advisers rate as the top challenge in 2010: Volatility. The limit-down move made it impossible for those who didn't take protection ahead of the report to cut their losses. Volatility to the upside may be exhilarating; this version produces an "inverse thrill.” Given the supply and carryout estimates in the January reports, upside volatility will be harder to come by.
Another Slow Spring. With comfortable supplies and likely higher acres, some pressure is off the need for big crops in 2010. But if this season shapes up as Larry Acker of 3F Forecasts sees it, traders will find it hard not to react.

"The spring will be cooler and wetter than normal, and soil will be slow to dry because of lack of wind,” Acker says. "In addition, we could see some lowland flooding. Mid-May and mid-June are the only drier periods the entire season.”

Compounding the moisture is the Dalton cycle, which means cool growing seasons. It began in late 2008 and will be a factor all the way to 2066, Acker says. "This cycle is also known as the starvation cycle, and it will be challenging for farmers to grow food as long as it lasts.”

"From June into fall will not be particularly warm and will be fortunate to average near normal temperatures. There is major potential for an early frost, especially north of I-80,” he says. "The only periods that may be warmer than normal are July 4 to 11 and Aug. 10 to 16.”

Acker also cautions that given his weather forecast, disease and insect cycles (stalk and ear rots, corn rootworm, sudden death syndrome and especially soybean rust) will have an effect. Conditions will not favor soybean aphids, corn borers and spider mites, however.

His computer program projects 80 million acres planted to corn and a 12.57-billion-bushel crop. Soybeans will be planted on 78 million acres, and the crop should total about 3.25 billion, he estimates.

"Planting early hybrids is strongly encouraged, and crop insurance isn't a bad idea especially if you have low-lying ground,” he says.

The current El Niño is factored into these projections. It's effect may be negative elsewhere in the world: It could mean India's monsoon is at least a partial failure for the second consecutive year; China's summer should be warmer and drier than normal; and South America and Australia could face changeable weather conditions.

Dollar. Corn prices show a 73% negative correlation with the dollar, reports Rich Nelson of Allendale. "This means if the dollar falls 10%, corn should rise 7.3% and vice versa,” he says. Early in 2010, the trade-weighted value of the dollar was about 90 for corn, so it should, indeed, be boosting price by about 7%. The index is actually a bit lower for soybeans and wheat (see graph).

However, the dollar was showing some strength, apparently because of global economic factors. That may be temporary, notes Mike Woolverton, Kansas State University grain economist. "But if the uptrend is sustained for very long, it will have a negative effect on U.S. exports—and prices—this year.”

As the dollar value rose, the prices of gold and oil dropped by about 10%, Woolverton adds. "A likely explanation is that when the dollar was dropping in value, traders and investors borrowed at near zero nominal interest rates to invest in risky assets, including commodities. The real rate of interest on the borrowed money, because of the falling dollar, was actually negative. The rising dollar has caused traders and investors to pull back.”

The question is what will happen next? "Dollar index open interest remains very high,” Woolverton says. "Presumably, these are driven by open short positions, which gained value as the dollar dropped. If the dollar strengthens, traders will buy back dollars to close these positions. The resulting soaring dollar value will cause commodity prices and exports to fall.”

U.S. Fundamentals.
Yes, USDA reported a hefty 6-million reduction in wheat acres in its January reports. Nonetheless, supplies are excessive in the U.S. and in the world. U.S. ending stocks were pegged at
976 million bushels. Assuming a 43.5 bu. per acre average yield on those 6 million acres, the U.S. lost 261 million bushels. If they come out of the stocks, the U.S. still has more than 700 million.

"This is huge,” says Bill Biedermann of Allendale. "In addition, world stocks at 195 million metric tons (mmt) are up 121 mmt from just two years ago and are equal to more than 7 billion bushels. That puts value at close to $4.”

Corn's ending stocks at 1.76 billion are comfortable, and world stocks are now 6% above the five-year average. "Price implications suggest an annual average between $3.20 and $4.40,” Biedermann says.

The record 3.36-billion-bushel soybean crop resulted in ending stocks of 245 million bushels, which is nearly double this past year's. "The real bearish factor is world stocks,” Biedermann says. "At 59.8 mmt, they are nearly 2.2 billion bushels or two-thirds of a U.S. crop! Stocks are the largest since the January report of 2006—a month when futures traded between $6.39 and $5.72.”

Looking to the 2010 crop, the 6 million wheat acres will be divvied up among other crops, so spring bidding for acres likely won't be aggressive. "As February prices determine crop insurance coverage for spring-planted crops, many producers will be deciding which crop will lose them less money,” observes Jerry Gulke of the Gulke Group.

Bottom Line. Margins promise to be relatively tight, making it important to lock in input costs, including fertilizer, fuel and interest, says Bob Utterback of Utterback Marketing. At the same time, grain price expectations may need to be lowered somewhat—and rallies should be rewarded, he says. "I'd look to price production aggressively and rely on options strategies to add value and keep the upside open in case of a crop disaster.”

Top Producer, February 2010

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