Time to walk while everyone else runs?
Grains have had some nice rallies the past few weeks. The corn market recorded a nearly 30Â¢ rally right before harvest of the second largest yielding crop in history.
While acreage was down due to high energy prices last spring, energy prices have dropped 20% in the past 2 months. This should provide incentive for producers to plant more in the coming year. Informa, on Friday, released a negative planting report for 2007, with some huge acreage shifts that are almost unheard of for grains (+8% wheat acreage, +4.7% corn, -4.4% soybeans). These are wild guesses based on the price levels and profitabilities today.
But, the estimates are likely somewhat accurate at $4.50-$4.75 wheat, $3 corn, and $6.15 beans. Those prices will strongly favor corn and soybeans over wheat (as Pro Ag has been saying for weeks). With a record large corn and soybean crops (or close) just about to be harvested and this huge acreage shift likely for 2007, Pro Ag is reluctant to be bullish grains. The crash in outside markets (crude down nearly $20, gold/silver lower) also makes us jittery about the prospect of commodity inflation continuing. Net, we wonder about the merits of not selling $4.50 wheat and $3 corn, especially with sharply lower fuel prices. Its likely with crashing energy costs, if anything the acreage shift could be even larger than the Informa guesses.
Harvest yields are improving for soybeans, as we get into the full season beans, with some surprisingly good yields recorded even in the worst states (ND, SD, MN). It's likely, USDA's current projection for these worst states of the US will need to be hiked in future reports, with Pro Ag expecting a 43.1 bu/acre forecast in October (just under a new record) with the Nov report likely to move to 43.4 and the final Jan report closer to 43.5. Corn yields may not see as aggressive of yield hikes as beans, with Pro Ag expectations at 156 bu/acre for October (yield hikes in the eastern Corn Belt, but some reductions in the far western Corn Belt), 157.5-158 for November, and 158-159 for the final Jan report. Currently USDA is projecting corn yields at 154.7, so the final number should not be a shock to the market (although it will be somewhat negative).
As we move into the throng's of harvest of the second largest crop in history, the corn market seems to have some 'irrational exuberance'. The assumption about the future shortages of corn are a long ways off, but the market seems to want to solve that problem now by pushing corn prices up so that a 1.2-1.5 billion bu carryout in 2006/07 needs to grow rather than shrink! That could be an ugly situation if next spring we have 1.8-2 billion carryout corn. But, the market is trying to solve the problem of a potentially shortfall of corn in 2007 or 2008 now by rallying-a seemingly distant situation. Harvest should advance more rapidly this week, with the western areas likely to have some disappointing yields. But, the large crop is really in the central and eastern Belt, where record yields are likely.