Markets

Corn

Slouching toward harvest
by Dr. Robert Wisner

Look for continued high volatility in prices at least until early November. Both the U.S. yield and harvested acreage will remain quite uncertain until the USDA Nov. 10 crop production report. That’s because of late plantings, flood damage, a slow start to the crop and very late replantings of flooded areas.

A U.S. 2-bushel-per-acre change in either direction from the Sept. 12 production forecast could easily move prices $0.75 to $0.85 per bushel in the opposite direction. USDA will likely update its harvested acreage estimates in November, and possibly as early as the Oct. 10 report. For corn that you need to move at harvest, take advantage of short-term rallies to boost sales. Prices will likely remain at historically high levels into spring to ration tight supplies.

Early indicators point to gradual slowing of domestic feed and export demand, with these trends being offset by a continued expansion in corn processing for ethanol.

Because of tight supplies and government-mandated increases in ethanol production, corn feeding may have to be reduced by as much as 9 percent to 14 percent from the 2007-08 marketing year. The amount of required cut in feed use will depend heavily on the final crop estimates. We expect U.S. corn exports to be cut back 15 percent to 18 percent due to the combined effects of better foreign crops and the rationing effect of historically high corn prices. Even so, it looks like Aug. 31, 2009 U.S. corn carryover stocks will approach minimum working stock levels needed for feeding, exports and processing. At the world level, early projections show a continued tightening of carryover stocks in the year ahead. If the projections materialize, the 2008-09 marketing year would mean global feed grain production has fallen short of use in 8 of the last 10 years.

The U.S. and world projections indicate the markets this winter and next spring will be strongly influenced by a battle between corn and soybeans for more acreage, both in the U.S. and South America. In Brazil, the strong local currency and very high trucking costs from interior cropping areas to ports will require continued historically high prices if more acreage is to be brought into production. With Argentina’s severe export taxes removed, a modest increase in corn and soybean acreage can be expected.

Soybeans

Frost on the hedges
by Dr. Robert Wisner

Like corn, bean prices will be very sensitive to the timing of the first killing frosts across the Corn and Soybean Belt, as well as USDA adjustments in harvested acreage and yield estimates. A U.S. yield of 41 bushels per acre or less in the Sept. 12 USDA crop report would signal very tight soybean supplies for the year ahead. That would point to a good chance for at least modestly higher soybean prices into January. The late fall-winter market would reflect a need for rationing as well as needed incentives to expand South American plantings and to encourage increased U.S. soybean plantings next spring.

In addition to supply and demand, other key influences on soybean prices this winter will include government policies. The December 2007 Energy Bill mandates that half a billion gallons of biodiesel fuel be produced and used in 2009. Another policy effect is whether CFTC (the futures regulatory agency) will continue to allow index “hedge” funds to buy commodity futures as hedgers, thus by-passing limits on position sizes. Congress has held hearings on this issue and has asked CFTC to look into it. Index funds buy and hold large amounts of commodities including grains, metals and crude oil as a hedge against inflation. The normal definition of a hedge requires that the trader have equal and opposite positions in the physical commodity market and the futures market, and uses the futures market to protect cash prices. Index funds have no position in the physical commodity market. Their extensive purchases of long futures appear to have helped push prices to historically high levels in order to find traders willing to sell to the funds. Stretching the hedging definition allows index funds to avoid size of trade limits for speculators and to benefit from lower margin requirements (a sort of down payment).

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

Cattle

Beef demand weakens with the economy

Consumer demand for beef declined for 20 consecutive years between 1978 and 1998. But, beef demand bottomed in 1998 and trended upward for most of the years since 1998. (See chart) However, in the years since 2005 beef demand has weakened, and, for the first 5 months of 2008, our index showed beef demand was 22.6 percent below the 1985 level.

Much of the decline in beef demand between 1978 and 1998 was due to competition from other meats and consumer concerns resulting from publicity that beef did not fit well into a healthy diet. However, the beef industry put much effort into promotional efforts and pointing out that beef could fit into a healthy diet. Even though competition from pork and broilers remained strong, the downward trend reversed in 1998.

With continuing high feed prices, the supply of beef is expected to be smaller and the price of beef is expected to increase substantially in the next few years. This, in addition to the weak economy and competition from other meats, will possibly result in weaker consumer demand for beef.

From January to May, our demand index for beef at the consumer level was down 2.6 percent from a year earlier and demand for live fed cattle was up 1.4 percent. The decline in consumer demand for beef is believed to be due to the weak general economy and strong competition from other meats. Consumer demand for both pork and broilers was up 3.5 percent for January to May.

Cattle producers are continuing to reduce the breeding herd. Cow slaughter for this year through May was up 4.8 percent from 2007 and up 20.7 percent from 2006. Dairy cow slaughter was up 1 percent from a year ago and up 15 percent from 2 years ago. Beef cow slaughter was up 7.6 percent from a year ago and up 25 percent from 2 years ago. Our ability to calculate the rate of decline in the cow herd is not very good due to the limited information available on the number of heifers being retained.

Exports of beef in January to April 2008 were up 32.7 percent from a year earlier. Net beef imports as a percent of production for January to May declined from 8.4 percent in 2007 to 4.1 percent in 2008.

Swine

Integration steps up

Contract production of hogs has become a very important part of the U.S. pork industry. This method of production is characterized by a producer (grower) owning the production facilities, providing utilities and labor, and another producer (contractor) owning the hogs, providing the feed and health needs, and assuming all price risk. The grower’s basis of payment is either the amount of floor space provided, a rate per head of animals raised, or the amount of weight gained.

This method of production has permitted some young farmers to enter the hog business. In some instances, agricultural lenders have financed 100 percent of a new facility when the grower had a contract with a reputable contractor. In 2003, 23 percent of U.S. hogs were farrowed under contract, up from 17 percent in 1997. In 2003, 41 percent of U.S. hogs were finished under a contract, up from 30 percent in 1997.

Our index for U.S. consumer demand for pork during January to May was up 3.5 percent from 2007, and live hog demand was up 7.5 percent. Pork exports in April were up 95.6 percent from a year earlier and set a new record monthly high. In January to April, pork exports were up 52 percent from 2007. Net pork exports as a percent of U.S. pork production increased from 9.7 percent in 2007 to 15.6 percent in 2008. The increase in pork exports is the reason live hog demand showed more increase than consumer demand in January to May this year.

With sky-high feed prices, pork producers will be severely stressed until the hog herd can be downsized. However, some producers are minimizing these losses by using the futures market to price hogs.

Glenn Grimes is a MU professor emeritus and long-time market analyst.

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