Markets
Corn
Financial bears scratch corn
by Dr. Robert Wisner
Look for continued volatility in prices through at least mid-February, but with the market leaning toward the upside. Any widespread areas of dry weather in Brazil and/or Argentina could bring significant strength. Along with South American weather, crude oil prices will be an important market influence. Tight soybean supplies will set the stage for a significant battle for crop acreage again this winter and early spring. Corn prices need to be high enough to win the battle and provide more corn for next year’s expansion in ethanol production, but the bean market will attempt to limit the shift from beans back to corn. Early indications point to a potential need for at least 3.5 to 5 million more corn acres in 2009. Potential sources are soybeans, perhaps half a million CRP acres, some pasture and hay, and maybe a small amount from soft red winter wheat.
Although corn and soybean supplies look tight through at least next summer, don’t expect a repeat of last season’s prices. It could happen if spring weather is bad or South America has a severe drought. But barring those conditions, several developments are likely to temper the upside potential. For one thing, there is much greater availability of feed wheat than was possible with last season’s weather-reduced crop. Also, the world economy will be slowing in response to very high fuel prices and financial problems.
In the ethanol industry, the expansion is likely to be tempered by tight margins, national production nearing the 10 percent average ethanol-gasoline blend and financial troubles of some key ethanol firms. As the 10 percent average blend level approaches, ethanol prices are at risk of further downward pressure. The E-85 market is limited both by the relatively small number of flex fuel vehicles and the limited number of retail outlets. Both are increasing, but probably not yet fast enough to keep up with the potential expansion in ethanol production. Also, fuel mileage drops by around 24 to 28 percent compared to gasoline when flex fuel vehicles use E-85. That’s because ethanol has approximately two-thirds the energy content of gasoline. Lower fuel mileage means consumers will want a substantial price discount to shift from gasoline to E-85.
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Soybeans
Tight stocks and hungry Chinese pigs keep beans on edge
by Dr. Robert Wisner
Watch for USDA’s January final crop estimates for the 2008 season as well as the grain stocks report that will be out at the same time. As we went to press, most market indicators pointed to a very tight U.S. and world soybean supply situation, which should strengthen prices into mid-winter. Any decrease in the 2008 crop estimate or lower than expected stocks would add further tightness and upward pressure on prices. Bean prices also will be unusually sensitive to South American weather and final acreage numbers in Brazil and Argentina. USDA projections show only a small increase in the Brazilian soybean crop for next spring, along with a modest increase in Argentina.
Tight U.S. and world soybean supplies plus continued growth in Chinese demand are setting the stage for another battle between corn and soybeans for cropland. Barring a drop in the world crude oil price below $90 to $100 per barrel, it looks like corn will win the battle because of a need for more corn to meet the demand from rising ethanol production. However, the soybean market will be unwilling to let too much acreage shift over to corn. At the 7-year average world demand growth rate, the world would need about 8 million more soybean acres in 2009. Our early and very tentative projections show U.S. soybean acres declining by 3 to 4 million acres. Early USDA projections show combined Brazil and Argentina soybeans up 5.7 million acres from last season. That’s for the crop to be harvested this coming spring. China alone represents 44 percent of the U.S. soybean export demand, and its purchases of U.S. soybeans increased almost 17 percent in the marketing year ended Aug. 31, 2008. Chinese officials have recently indicated that their pork industry is in an accelerated expansion phase after last year’s disease problems. Their poultry industry also is continuing to expand, making it likely that their soybean imports will rise again this season.
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Wheat
Wheat stocks rebound
by Dr. Robert Wisner
Plan to use rallies this winter to boost sales of both hard and soft wheat. This season’s sharp expansion in the world wheat crop was concentrated more in soft wheat than in milling quality hard wheat. That means hard wheat prices may have a bit more upside potential than those for soft red wheat. Potential sources of strength in prices this winter include the battle for crop acreage, as well as possible weather concerns in the U.S., China, Europe, and former Soviet republics. But upside potential almost certainly will be much less than last winter.
Recent USDA estimates put the current season’s world wheat crop at about 10.7 percent above the previous year, when production was reduced by a severe Australian drought as well as weather problems in the U.S., Canada, Europe, the Ukraine, and several other areas. At the world level, that is a huge 2.41 billion bushel increase, the equivalent of adding another U.S. crop to the world supply and having some left over. The biggest estimated increases are in the Ukraine (+76 percent) and Australia (+69 percent). Keep in mind, Australia’s crop was not yet harvested when this estimate was made. At press time, Australians reported crop prospects were declining because of dry weather. Increased production for other countries included a 27 percent gain for Canada, 23 percent for the EU, 21 percent for Russia, 19 percent for the U.S., and increases of 4 percent each for India and China.
At this writing, U.S. hard red winter wheat export sales are down 8.8 percent from the phenomenal level of a year earlier. In contrast, soft red winter wheat export sales are down 16.6 percent.
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Cattle
Beef trails inflation
by Glen Grimes
Retail choice beef prices are setting new highs in 2008 in nominal dollars. However, in deflated dollars, the record high for choice beef was in 1973 (see chart).
One of the reasons that choice beef prices have not kept pace with inflation is feed prices have remained quite low in deflated values until the last couple of years.
Another reason why beef prices have lagged inflation is that production has become more efficient. In the early 1970s, beef production per cow in the inventory was 444 lbs. per year. By 2007, beef production per cow in the inventory had increased to 628 lbs., or an increase of 41 percent in less than 40 years—an average of about 1 percent productivity growth each year. Some additional productivity growth in the future is likely but it probably will not average 1 percent annually.
Retail choice beef prices in July at $4.34 per lb. for the components of a beef carcass set a new record high in nominal dollars. The previous high was $4.31 per lb. in November 2003. Additional increases in retail beef prices are expected through the remainder of 2008 and into 2009 due to the extremely high prices of feed.
All segments of the livestock industry benefited from these record high retail prices. The processor-retailer margin for January to July was up 4.6 percent, the packer margin was up 0.7 percent, and the cattle feeders’ price was up 0.6 percent from a year earlier.
Our demand index for beef at the consumer level for January to June was down 4.7 percent from 2007. In fact, consumer demand for all meats was weak in the first half of 2008. The major reason for the weak consumer demand for meat is likely the high energy prices and the weak general economy.
U.S. beef and veal exports for the month of June were up 27.1 percent from a year earlier. For the January-to-June period beef and veal exports were up 31.2 percent compared to a year ago while beef imports for these 6 months were down 21.5 percent.
U.S. net beef imports as a percent of U.S. beef production declined from 7.9 percent in January to June 2007 to 3.5 percent in the first 6 months of 2008. It now appears the U.S. could become a net exporter of beef and veal within the next 2 years.
Live feeder cattle imports from Mexico were down 33.7 percent in January to June compared to these months last year. However, because live cattle imports from Canada were up 45.6 percent during these 6 months, total U.S. imports of live cattle were up 8.5 percent compared to a year ago.
Fed cattle prices for late 2008 and 2009 are expected to be more than $100 per cwt. based on live cattle futures prices in August 2008. Because the supply of feeder cattle outside of feedlots on July 1 was slightly larger in 2008 than in 2007, we expect beef production in 2009 to be close to 2008. We believe fed cattle prices are likely to average in the mid-$90s in 2009.
Cash feeder cattle prices are staying quite strong considering the price of feed grain. We expect some weakness in feeder cattle in late 2008 and 2009.
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