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Ray Grabanski: Corn, soy prices explode to new highs

Ray Grabanski 10/14/2010 @ 8:51am President, Progressive Ag www.progressiveag.com

Grain prices exploded to new highs in corn and soybeans after, last Friday's blockbuster USDA report, where corn yields were dropped record amounts during an October report of a non-drought year.

It was amazing that corn yields just weren't there, even when crop conditions suggested a much better crop was out there in 2010. Ironically, on Tuesday, Oct. 12 crop conditions improved another 2% in corn, with the Pro Ag yield model rising another 1.5 bu/acre. Regardless of what yield models say, though, the only thing that really matters is what shows up in the combine hopper, and ultimately into the bins. 

In 2010, for whatever, reason, the miracle corn hybrids that we've been singing the praises of the past few years just didn't produce in 2010. Yields have been disappointing at harvest, and therefore USDA has dropped yields all the way to 155.8 bu/acre for 2010. That has taken ending stocks of corn down to 900 mb, and the scary thing is that we still don't know the final corn yield as USDA could reduce yields again in the November and Jan final report. With little excess carryover stocks left, we have little room for any further cuts in yields.

Prices are responding to the concerns by rallying to new highs daily since the report. Corn is approaching the $6 area, up $1.20 from just over a week ago. These rapid price rises are going to eventually have an adverse affect on demand.  Especially feeling the pinch are cattle feeders and importers, as corn export shipments are slowing in corn as well as are corn sales. It's the exports of corn that so far are suffering from the high prices, but sooner or later $6 corn will limit the demand of many other areas of corn use, too (including ethanol and feed use). But the market's purpose right now is to limit demand of corn, allocating the short crop (we are now below 'trend' yields around 160 bu/acre) among the large demand expected for 2010.

Due to short crops of feedgrains around the world, its expected that the US crop of corn and wheat will meet the shortfalls around the world. The US corn crop is no longer there, and its likely that US wheat will be stretched thin, too, by the time we are all done with 2010/11 marketing year. It's likely that wheat is priced as a feed grain again, especially with corn nearing $6/bushel. 

The ethanol blend was approved at 15% for newer cars this week, and that might help ethanol producers but the real battle for them may be extending the ethanol subsidies in Congress (which expires at the end of this year). Without the subsidy, there will be a huge decline in ethanol use of corn as the profitability will quickly swing the other direction. Already ethanol producers will see much tighter margins as corn runs over $6 (remember in 2008 when corn exceeded $6, ethanol producers simply shut down and sold back their corn to the market). 

While corn has tight stocks, soybean stocks are not nearly so tight, with still over 250 mb of stocks projected for the end of the year. Still, soybean prices rallied $1.20 with the corn market in the most recent week (not keeping pace with corn, though, in the typical 2.3 ratio of soybeans/corn). South American producers have more incentive to plant more corn at these price levels, as will 2011 US producers. That is something that might tighten up the soybean S/D sheet as we approach next summer. For now, though, soybean stocks are adequate, although much tighter than projected in September. 

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