Bullish corn at $7.40 is risky
Recently, grain markets have received all bullish news, with media reports of smaller than expected yields likely for corn and soybeans in 2011, and USDA's August report numbers that were shockingly low for corn and soybeans.
While USDA did not want to repeat last year's mistakes (a higher crop estimate in August, only to have to lower it all the way into the final Jan report), the rest of the world seems to be content to echo their sentiment. We wonder about the wisdom of being bullish grains at $7.40 corn futures!
While the 2011 crop has suffered under above normal temps in July, much of the 2011 crop NEEDED heat sometime this summer to make the crop, as it was planted much later than normal in most areas (especially the eastern Corn Belt). While much has been made about the damage to the 2011 crop in July due to heat, perhaps some heat was needed in 2011? This same heat will reduce the risk to frost this fall in spite of a very late planted corn and soybean crop in 2011. The best corn and soybeans are in the northern states, where rain has been plentiful all summer and crops are in the best shape of anywhere in the country as heat didn't hurt the Northern crop as much as the Southern crop.
While the 2011 crop isn't a banner crop, it also is not a crop failure either (although the market and media seem to be implying that is true right now). Pro Ag yield models currently suggest a crop size of nearly 159 bu/acre corn and 43.5 bu/acre soybeans - both about the same crop size as the July estimates. USDA's August report was a full standard deviation below both the corn and soybean yield estimates, and it just doesn't seem very likely that the crop is that bad.
Especially troubling is their low soybean crop estimate as of Aug. 1 conditions, when everyone knows that its August weather that determines the soybean crop size, not July weather. While July was a warm month historically, August has provided cooler temps across the Corn Belt, with temps likely to average about normal across the Corn Belt (and lower than normal in the eastern Corn Belt). That is not the type of weather that brings significant stress to soybean crops!!!
Pro Ag also is cautious about projecting images of a poor world 2011 crop, when former FSU countries actually may have produced a record large crop in 2011. Winter wheat yields in Ukraine were record large this past year, and current USDA projections will likely need to be raised for Ukraine, Russia, and Kazakhstan for wheat and feed grains. This is not the type of news that produces new record high prices for corn!!! Yet corn prices are on the verge of running to new all-time highs, with the Dec contract running to new highs recently (but not above nearby corn futures all-time highs). Perhaps the market has all the bullish news built into prices already?
Typically, grain prices drop during the harvest, and right now we are right around the corner for corn and soybean harvest, with August waning away and virtually no sign of a potential killing frost yet in sight. In fact, the weather has remained with mostly above normal temps in the west, and normal to below normal temps in the eastern corn belt. HRS wheat harvest has been accompanied by mostly warm/dry weather, allowing the harvest to progress with little to no harvest losses.