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Let March madness begin
It's game time Friday morning at 7:30 am CST, with the yearly Prospective Planting
Intentions report by USDA. It may be the most anticipated government
report in the past few decades!
For this report will tell us how responsive
grain producers are to the strong incentive to increase corn acreage over
virtually every other crop in 2007. We've never gone through a winter where
corn futures have bumped over $4 for new crop prior to planting, so it will
indeed be a learning period for all the grain markets to see how farmers respond
to this incentive.
Expectations are for a 9.5-10 million acre increase in corn acreage, and a 5-6
million acre cut in soybean acreage. Most of the other acres will come from
other crops, most notably cotton and HRS wheat acreage. Many minor crops may
also see significant impacts.
But as is often the case, the report itself might end up being a bearish event
as buyers are reassured that producers WILL PLANT SOMETHING! Just eliminating
some unknown factors can provide price pressure. The question on everyone's
mind is, will farmers steal enough acres away from soybeans and other crops to
meet the projected corn demand?
Another question answered will be the corn use
in the last quarter: Did feed use get cut significantly the past quarter? If
so, it may imply we don't need as many corn acres in 2007 as thought, as the
same response could be expected for the last half of the 2006/07 marketing year,
and also continue into next year's marketing year (2007/08). With a 300 mb cut
in corn use this year (repeated next year), that would effectively eliminate 4
million acres of needed 2007 corn acres.
So the numbers will be out tomorrow, and the debate about how they will change
heading into the June final planting report will be on. So far, a very warm
March has gotten planting off to a great start in southern areas, with
relatively good soil moisture conditions in most areas (slightly dry in the
Delta/Southeast and into the northwestern central Plains, ideal moisture in the
middle Corn Belt, and too wet in the eastern Corn Belt). For the most part,
fall and winter have cured a lot of dry areas, with just limited 'drought'
remaining in the country. The warm temps seem to benefit everyone, but moisture
conditions need to straighten out a little more for a 'bumper' to be assured.
Bearish weather would be wet in the west (with intermittent planting periods),
dry in the east (which is similar to the forecast the next 5-10 days). Bullish
weather would be cold and wet everywhere, as we start planting (especially in the
eastern Corn Belt).
So far this week (and month), the market has exhibited significant weakness in
corn, and strength in soybeans (especially 2008 forward). Of particular
interest has been the weakness in nearby corn contracts, implying that the
current corn use has declined, and the cash market situation is becoming that more
abundant stocks of cash corn are available. For corn, this has meant a terrible early spring basis. Is this tipping the hat of the stocks report, with higher stocks than
anticipated? The May nearby contract has dropped nearly 60c from its high, just a month ago, and is starting to look quite toppy on technical charts.
While the May contract has struggled, the new crop 2008/2009 soybean contracts
have rallied to new highs, dragging the 2008/2009 Dec corn futures along for new
highs in these contracts as well (albeit reluctantly). Funds and speculators
are rolling their long positions in old crop corn forward as they seem convinced much of the 'corn problem' may have been solved by the high prices the past
few months. Did we slow corn use enough, and attract enough new acres of
planted corn in 2007 with high winter corn prices?
Perhaps finding enough
acreage for 2008 to meet expanding biofuels demand is the next problem to
Tomorrow we may discover this answer, but today it appears the market is
convinced that has occurred. Is the market right?
If the planting mix is corrected to the demand expected in 2007 (much more
corn), then the market might look forward to the 2008 years and forward. If we
could get the corn problem corrected in 2007, though, when we needed to
'correct' for the bad decisions of 2006 (when corn acreage was cut and soybeans
expanded) and the ethanol expansion, then perhaps the jump in corn demand in
2008 can be solved, too?
The only additional problem for 2008 is that we cannot keep robbing from soybean
and HRS wheat acreage to meet corn demand. Sooner or later enough incentive to
cut grain use must occur (or an expansion in total planted acreage). So far,
high corn prices doesn't appear to be cutting investment in ethanol plants. So
the market focus could shift to 2008, and potential shortages in soybeans (and
other grains) due to the 'robbing' of acreage to feed the corn ethanol monster
this year. For now, grain markets could relax if the 2007 problem is solved
before heating up for 2008.
Of course, assuming 'normal' trend yields is still a great assumption in 2007.
There's no person who can predict precisely at this point whether yields will be
'trend', above trend, or below trend. This might become the big debate for the
next 5-6 months, with all the twists and turns that come with weather markets.
Currently, winter wheat country is enjoying perhaps the best winter/early spring
in years, with more abundant moisture expected the next 5 days (enough to
eliminate the drought in eastern KS/OK/TX?). That could be an ominous sign
for grains, but it's still early to throw in the towel for a bull market. Or is
Let the March madness begin!!!
It's game time Friday morning at 7:30 am CST, with the yearly Prospective Planting Intentions report by USDA. It may be the most anticipated government report in the past few decades!