Markets

Corn

Keeping more at home
by Dr. Robert Wisner

Most indicators suggest corn prices will increase significantly into the winter months. On-farm storage profit potential looks good, although one area of risk is the price of crude oil. The crude oil market drives ethanol prices, thus affecting the economics of converting corn into motor fuel. Most analysts close to the oil market appear to look for at least steady crude oil prices, with some potential for higher prices as a result of geo-political uncertainty. If you need to buy corn for livestock, watch for opportunities to lock in prices for some of your required supply before the harvest season is finished.

Timing of the first killing frosts across the Midwest will be very important to the corn market, if frost has not yet occurred as you read this. Much of the crop has been well behind development across the Corn Belt. In Iowa, Minnesota, and the Dakotas, at least 15 to 20 percent of the crop likely will need a frost 10 days to 2 weeks later than normal. The crop also is considerably later than normal in Missouri, Indiana, Wisconsin and parts of Nebraska. A normal or earlier frost would reduce test weights and yields, with a strong price reaction likely. The Oct. 12 crop report may not be able to adequately reflect actual or potential yield losses from this source. Also, it may not fully reflect final harvested acreage. Watch for USDA’s next crop production update on Nov. 12.

Early indicators continue to point to a slowdown in U.S. corn exports, from the all-time record level of last season. As we went to press, 2008-crop corn export sales were 22 percent less than at the same time a year earlier. The decline to a large extent reflects sharply higher foreign wheat production, after widespread problems last year in Australia, Europe, the Ukraine, Canada and other areas. In a normal year, over 4 billion bushels (corn equivalent) of wheat would be fed internationally. Last year’s critically tight wheat supplies shifted part of that demand to U.S. corn. Even though the world wheat crop looks much better than last year, weather this winter will determine the size of South America’s corn crop. Early indicators point to a very slight 40 million bushels higher production in Argentina, with the Brazilian crop holding about steady with last year.

Soybeans

The duel resurfaces
by Dr. Robert Wisner

Like corn, the potential for profitable on-farm storage of soybeans looks good. Storage in town is a little more uncertain, but odds of some profit potential look to be at least in the 60 to 70 percent range. Supplies for this marketing year look quite tight because of low stocks left over from last year’s harvest and yield impacts from late plantings. Even more important, we will very likely see another battle between corn and soybeans for crop acreage this winter and early spring. In fact, that battle will be starting to develop in Brazil and Argentina as you read this. Any serious weather concerns in Brazil, Argentina or the United States from January through next July would create the potential for an explosive market.

The driving force in the battle for more crop acreage is ethanol. Recent projections put ethanol production for the current marketing year at about 3 billion bushels more than 4 years ago. At a U.S. trend yield, that translates into increased corn demand equal to production from more than 19 million acres.

Corn has pulled a substantial number of acres from cotton, soybeans and minor small grains, as well as some hay and pasture ground. This year, soybeans took back some of those acres, but the corn processing industry will need them in 2009 to keep pace with the expanding ethanol processing. In South America, early reports indicate a very modest increase in soybean production is likely at recent prices. The Brazilian exchange rate has worked to the disadvantage of soybean growers. With rising input costs, trade sources indicate futures prices in the mid-teens or higher may be necessary to generate substantially accelerated expansion in that country’s bean acreage. In Argentina, where the exchange rate issue is not as strong a concern, farmers anticipate a modest increase in soybean acreage and about steady corn plantings. Part of the increased soybean acreage may come from wheat.

In contrast to corn, U.S. soybean export sales have started off strong this season.

Cattle

Heavier into corn

Grain adds cost exponentially, calves will stay on grass longer Feeder cattle prices in nominal or current dollars have been record high in recent years, peaking in 2005. However, in deflated dollars, feeder cattle prices were the highest in 1973 for the 1973-2008 period. Feeder cattle producers have offset some of this loss by being more efficient. We do not have good data on the average weaning weight of calves, but now it is probably 100 lbs. more than in 1973.

During 2008 feeder cattle producers on average will lose a few dollars per head due mostly to high grain prices, which will reduce the amount that cattle feeders can pay for cattle. Remember, each 10-cent increase in the price of a bushel of corn reduces the price of 400 to 500 lb. calves $1 to $1.25 per cwt. and 700 lb. feeder cattle $0.50 to $0.75 per cwt.

With the higher feed prices that are likely for the next few years, the U.S. cow herd will be reduced. In fact, the beef cow herd was 0.6 percent below a year earlier on July 1 this year.

The average weight of cattle being placed on feed is expected to increase over the next few years because of higher corn prices. Calves will be held on grass for a longer period of time before being placed on feed.

Consumer demand for beef in January through June was down 4.7 percent from a year earlier. In fact, the demand for all meats was down during the first 6 months of 2008. The good news is that our demand index for live fed cattle was up 0.5 percent for January to June 2008 compared to 2007.

Retail beef prices for January to June were up 1 percent from a year earlier. However, retail beef prices did not keep pace with the inflation rate of 4.2 percent during this period. The processor-retailers’ share of the price kept pace with inflation, but the packers’ and cattle feeders’ margins were negative.

U.S. exports of beef continued to grow in 2008. For January through May beef exports were up 32.6 percent compared to these months a year ago. By country of destination, our exports were up 11.5 percent to Mexico, 45.1 percent to Japan, 48.7 percent to Canada, 35.8 percent to Taiwan, 676.9 percent to Vietnam, and 28.1 percent to other countries but were down 63.6 percent to South Korea. The increase in exports is the reason our demand index for fed cattle was up during January to June while U.S. consumer demand for beef was down during the same period.

With U.S. imports of beef down 21.7 percent during January to May, our net import of beef as a percent of production declined from 8.3 percent in 2007 to 3.8 percent in 2008. Imports of feeder cattle from Mexico for January to May were down 32.4 percent but live cattle imports from Canada were up 41.4 percent. Total U.S. imports of live cattle during the first 5 months of 2008 were up 7.7 percent compared to this period in 2007. In July, the futures market was showing an average price for fed cattle in 2009 of more than $110 per cwt. With the 2008 calf crop only 0.3 percent below a year ago (based on the July 1 U.S. cattle inventory), the odds appear low that demand will be strong enough to support this price.

Click here to respond to this article