Calm before the storm?
We are barely over one week away from the critically important March 30 Planting Intentions Report by USDA, when they will give their 'survey based' estimates for acreages of various crops in 2007. Rarely has a report been so highly anticipated as this report in 2007, with huge needs for additional corn acreage to meet the surging ethanol demand.
Estimates by USDA are for a 50% expansion in ethanol use in 2007/08, compared to 3.2 billion estimated in the last USDA report. It's that need to provide the demand for expansion that is feeding the market, plus we need to make up for last year's drop of over 1 billion bu of carryout. The net need is to hike supplies/cut demand for the equivalent of 14-15 million acres of corn, a huge task for the market to handle.
The last USDA 'guess' on acreage was an 8.7 million acre hike from last year, with Informa at 9.5 million acre hikes. These are 11% and 12% hikes in acreage, but Pro Ag anticipates a hike of even more in this report. We'd expect acreage hikes of 9.5-10 million acres, but even this might not be enough to meet the new surge in demand. If that is all the planted acreage we get, we might need an additional 3-5 million acre cut in demand over the next 2 years to allocate our corn supply. Are prices high enough to do it?
That seems to be the critical question for now. Pro Ag also anticipates a 5.5-6 million acre cut in soybean acreage in the report, slightly larger than the last USDA/Informa estimates. This could provide support to soybean markets as we continue to rob from soybean acreage to feed the corn ethanol demand monster.
These are truly interesting times, as rarely have we had such heady changes in planted acreage from year-to-year. If we get too little acreage switched from soybeans to corn, there could be a huge market move by corn to try to attract those last few acres. Too large a switch from soybeans to corn could mean a depressed corn market, but a boost to soybean markets. No one seems too worried about running out of soybeans right now, but in corn that worry may be more real. We are already critically tight in projected ending stocks for 2006/07.
Of course, this will not mean the end of the marketplace movements that began last fall, as we still have a huge investment of new funds flowing into ethanol plant construction. We can rob from soybean acres for corn in 2007, but by 2008 the soybean supplies could become too tight to allow any more 'stealing' of acreage. Sooner or later, we need to slow down investment in ethanol plants, and therefore the expansion in ethanol use of corn that has been ratcheting higher every year. When this ends, then the bull market in grains will truly be over.
Have we hit that point yet? Probably not, although the profits from ethanol plants have been squeezed over the past 7 months. But they still are profits, and to this point the money flow hasn't yet ended towards ethanol development.