Markets
by Dr. Robert Wisner 

Corn
Corn tracks energy and the economy

Look for a continued highly volatile market for the next several weeks as the grain trade monitors fieldwork progress, weather prospects, crop conditions, and any indication of last-minute farmer decisions to shift from corn to soybeans. U.S. and world financial markets also will be potentially important market influences. Recent reports indicate some index fund traders at times have had to sell part of their commodity positions to generate cash to cover losses related to the sub-prime mortgage problems.

For the longer term, the U.S. likely will move to increase money supplies, thus to some extent inflating away the sub-prime problem. That in turn will probably bring an irregular decline in the dollar. A weaker dollar will tend to support export demand, although some decline in exports appears likely next season with better foreign crops. High crude oil and gasoline prices, partly related to the dollar’s weakness, will be supportive to the ethanol industry. The degree of support will depend on the ethanol distribution system’s ability to handle a 40 to 60 percent or more increase in ethanol production in the next 18 months. A large part of the increased production will be in the Midwest, but much of the additional supply will have to be shipped to the southeast, Texas and Oklahoma, and California.

U.S. state and national concerns about global warming and policy moves to limit greenhouse gas emissions also will be a longer-term influence on corn prices. In the U.S., most research suggests ethanol and biofuels have the potential to significantly reduce greenhouse gas emissions. Some researchers, however, believe the higher grain prices from U.S. ethanol programs will encourage land clearing in South America, and will increase greenhouse gas emissions there. 


Soybeans 
Soybeans short by marketing year’s end

Bean prices will almost certainly be extremely volatile for the next several weeks. Key influences will include weekly planting progress, weather, and the crop condition reports starting in early June. Any widespread delay in corn plantings would cause traders to anticipate a shift to soybeans and could weaken new-crop prices.

At press time, widespread grain trade anticipation of a substantial increase, perhaps 6 to 8 million acres, in soybean plantings was starting to emerge. High nitrogen fertilizer prices and uncertain fertilizer supplies were important factors behind trade ideas about increased bean plantings.

USDA estimates show only a small 7-million-bushel increase in Brazilian and Argentine crops plus a very low anticipated U.S. carryover stock this Aug. 31. That should help support old-crop prices into late July or early August. Recent USDA projections place U.S. stocks at only a 2.4 weeks supply at the end of August. Because of the huge shift of bean acres into corn last year and slightly below normal yields, the 2007 crop is estimated to be 440 million bushels below the current season’s use. The production-use gap is being filled by drawing down carryover stocks, but the excess stocks will be gone by harvest time. To fill this season’s productionuse gap, with no allowance for world demand growth, a normal U.S. yield would require about 10.4 million more U.S. soybean acres than were planted last year.

As with corn, the financial market uncertainty also will over-shadow bean prices. Currency exchange rates are one of the major links of soybean prices with stocks, bonds and other financial instruments. There also is the possibility that some big index fund traders might see a need to lighten up their soybean positions to cover housing-related losses. Index funds typically view commodity futures markets as a way to hedge against inflation—to protect pension fund investments and other assets from long-term declines in value.


Wheat 
Continued volatility in wheat market

Look for continued high volatility in the wheat market into at least early June, with the greatest volatility in hard wheat. As we went to press, wheat crops in Texas, Oklahoma, and parts of Kansas were suffering from lack of soil moisture, as well as delayed emergence last fall. Crop prospects in China, Canada and the U.S. Spring Wheat Belt also are potential sources of volatility.

Chicago soft wheat futures prices will be influenced by the Kansas City and Minneapolis hard wheat markets, but price volatility may be tempered by increased soft wheat acreage and favorable early potential yield assessments.

In the spring wheat areas of the Dakotas and northwest Minnesota, farmers have been telling us that corn, soybeans, canola, and sun- flowers will be strong competitors for acreage. That and potential quality-lowering disease problems are tempering the potential for increased spring wheat acreage. In Canada, barley and rapeseed are likely to compete strongly with wheat for cropland. Even so, at least modestly larger wheat acreage looks probable there.

The 2007 Northern Hemisphere wheat crop was hurt by weather problems in Europe, Canada, and other areas as well as in parts of the U.S. Great Plains. But the biggest driver in the high wheat prices was extreme drought in Australia for the second consecutive year. Australia’s crop is harvested in late November and December. With better U.S. and foreign weather and EU opening up its 10 percent set-aside land for 2008 plantings, wheat prices may weaken later in the summer. 

Dr. Robert Wisner is an agricultural economist at Iowa State University.
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