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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
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.
Of course, even if we get the huge acreage shifts to corn that we need in 2007
(possibly creating some excitement in other crops), we still have to deal with
the 2007 weather scene. For now, it's way too wet in the eastern Corn Belt, and
that could lead to problems planting corn (no matter what intentions are). Then
the crop size will be determined not only by planted acres, but also the yield
which is weather driven (not determined by man).
So again, the vagaries of the
weather will still drive the market this year, with the market sensitive to
every quiver or change in weather that might mean the difference between 140
bu/acre corn or 160 bu/acre corn. The end result in prices is still huge, no
matter what the planted acreage ends up being.
For now, the attention is on acreage planted, and what type of cushion
that gives to the yield potential of corn before things get interesting again.
Technically, corn handled a potential problem this week so far by running back
above $4 Dec futures, dodging a bullet for now on the technical side of things.
Let's see if we can continue to hold that for now, but we might be seeing a shift
back to the bullish side of things as we move closer to the intended acreage
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.