Sometimes the bug, sometimes the windshield
The old saying that sometimes you are the bug, and sometimes the windshield has been reiterated in grains this week/month. Some markets got crushed (corn) during the month, losing over $1 while soybean prices have hung in there pretty well considering the problems going on in the corn market.
The USDA report reinforced this "some grains the bug (corn), and some grains the windshield" (soybeans) perception. The report showed 2 million more acres corn than expected, and 1 million less soybeans such that it was bearish corn while soybean prices have been supported. Along with the increased planted acreage than expected, the report mostly indicated which grain was the winner, and which the loser in the market game for the coming year.
While soybeans lost a million acres in this report, making them more friendly by the tune of about 42 million bu, the corn went the other way. 2 million more acres means 300 mb more carryout, and even if USDA were to leave everything else the same in the July report, we'd jump carryout from 1 billion to 1.3 billoin, a 30% increase. Not only does corn have to deal with the perception of more acreage, it also has a crop condition index that is rated well above normal, indicating a higher yield than average or 'trend'. While USDA has projected yields in June below trend, our yield models indicate a yield increase from trend, perhaps 157 bu/acre or so. That would also add to the carryout, and with any cut in demand it wouldn't take much to push carryout to 1.5 billion, or even 2 billion bushels by the end of the 2009/10 marketing year.
Today, we have a soybean/corn ratio of 2.6 ($11.15 soybeans, 3.70 corn), quite high on the traditional ratio between these two crops for harvest. The current ratio is at the high end of past few YEARS of the recent ranges for the crops. Soybeans are obviously being rationed in the current environment, while corn use is encouraged and supplies are not really a concern right now. This is the time when producers are encouraged to increase their production of the soybeans (mostly which will need to be done by South American (SAM) producers). While the current price ($12.50 beans, 3.50 corn) will only exist for the next few weeks prior to the 2009 soybean harvest, the 2009 new crop ratio (Nov beans to Dec corn) is one that will apply to prices for the next 16 months! It would be extremely unsual for this ratio to hold that long.
That makes corn a non-sale today (and perhaps a buy for livestock/ethanol producers) and soybeans a must sell product today. Of course, the current ratio can be stretched further, especially for a short term situation. But in the long run, something will be done by producers and users of crops to make this ratio come closer together. The biggest producers making a decision about planting next is the SAM producer, and he is likely to add considerably to his soybean acreage at the expense of corn because the market is asking for it. For the next few months while SAM is lining up his financing, he is staring at incentives to produce soybeans and not corn. Guess what he will decide in the end?