1/02/01
Grain Outlook: Large
Crops, Strengthening Demand to Bring Higher Prices into Spring
Robert Wisner, ISU Extension
Economist and University Professor of Economics
U.S.
corn production was just below the 1994 record, and total U.S. corn supplies will
be 4.8 percent or 540 million bushels above last year, according to the
November crop report. Soybean yields
were hurt a little more than corn by dry weather. Total U.S. soybean
supplies are estimated to be up 2.5 percent or 74 million bushels from a year
ago. These estimates will be revised
again on January 11 and the quarterly stocks report will give an indication of
September-November corn feeding.. A
slight additional decline in both the corn and soybean crop estimates seems
likely. Using the November estimates,
increased demand is expected to absorb about three-fourths of the increased
corn supplies. Increased soybean demand
is expected to slightly exceed the increase in 2000-01 U.S. supplies because of
a recently announced EU ban on meat meal feeding.
World
feed grain supplies are projected to increase at a slightly slower rate than
the long-term demand growth, while the increases in world soybean production
and utilization are projected to accelerate slightly. Competition in oil and meal markets from Canadian canola and
European rapeseed will be less intense than last year, but competition from
South American soybeans is expected to increase by a more than offsetting
amount. Soybean meal prices have strengthened
by the European Union ban on feeding of meat and bone meal, in the wake of a
fresh outbreak of “Mad Cow Disease”.
The six-month EU-wide ban on feeding of meat and bone meal should modestly strengthen soybean and
meal prices this winter and during the early part of the spring planting
season. It is expected to generate new
demand equal to the meal-equivalent of 120 to 140 million bushels of
soybeans. Part of the extra demand will
be met by South American soybeans, especially during the April-June
period. Increased crushings for meal
are likely to keep pressure on soybean oil prices.
The 21-year
average increase in Iowa monthly average corn prices from October to May is
about 23 cents per bushel. This season,
an increase of 40 to 45 cents looks quite likely, with additional strength
possible if the western Corn Belt is still low on subsoil moisture at planting
time. Over half of that increase has already
occurred. The average increase for soybean
prices has been about 39 cents per bushel. A combination of slightly lower U.S.
crop estimates and additional meal demand from EU’s ban on meat and bone meal
feeding should generate a slightly above average seasonal increase in soybean
prices. For both corn and
soybeans, the long-term average seasonal peak in prices has occurred in May,
with the average low in October. Risks of declining prices into the summer
and fall historically have been large-- over 72 percent of the time for
corn for each month after May, and over 70 percent of the time for most months
for soybeans.
While
corn export prospects look good if Starlink problems can be solved, export
sales are off to a slow start, with shipments and sales 12 percent below last
year in USDA’s December 28 Export Sales Report. At the one-third point in
the marketing year, that is a caution that earlier projections for a 14%
increase need to be revised downward.
The totals for Japan, South Korea, and Taiwan were down 19, 61, and 7
percent respectively from the same time last year. These three countries normally have been our largest overseas
markets for U.S. corn. Shipments and
sales to Africa and the Western Hemisphere were up 7 and 3 percent,
respectively. Soybean sales and
shipments were up 13 percent with increases in a number of countries. Meal and soybean oil were down 9 and 18
percent, respectively. If large sales
to unkown destinations are excluded, the meal total was down 23 percent. Export sales of beans, bean meal, and oil
all improved sharply in the last month in the wake of the EU meat meal
ban. After losing the EU corn market,
the U.S. now has essentially lost the once-large EU soybean meal market as
well. GMOs are believed to be a factor
in loss of these markets. The
“Starlink” situation is retarding short-term corn export prospects. The U.S. FDA approval of “Starlink” was for
feed and non-food industrial uses only, and it was specifically excluded from
approval for being exported. In
November, it was approved for export to countries were it will be used only for
feed. However, in our largest corn
export market (Japan), it is illegal to use Starlink corn for food or
feed. Japanese buyers have been very
slow to make forward commitments until they are assured of Starlink-free
supplies.
An
unknown amount of Starlink corn has been co-mingled with supplies of other corn
in U.S. marketing channels. Its gene
also was reported last fall in a non-Starlink variety, thus increasing
nervousness in the grain trade. Japan’s
equivalent of the FDA not only prohibits imports of Starlink corn with a zero
tolerance level, but provides stiff penalties and jail sentences for people who
violate this regulation. Starlink may
also increase uncertainty about U.S. corn gluten feed and meal exports to
EU. The EU is our largest market for
these by-products of corn processing. Japan,
our largest corn export customer, will have a labeling program in effect next
April 1, 2001 for GMO corn and soybeans.
Recent prices for GMO and non-GMO soybeans on the Tokyo Grain Exchange
have shown about a 50 cent or more per bushel premium for non-GMO soybeans.
Soybean
product exports have been restrained by an expected increase in South American
supplies from next spring’s harvest, and by large palm oil supplies from
southeast Asia. Argentina’s 2000-01
soybean plantings are projected to be up 16 percent from last year, due partly
to increased double cropping after the wheat harvest. A 3 to 5 percent increase in Brazilian plantings appears to be
occurring.
With
supply uncertainty largely behind us, the markets will focus increasingly on
demand for the next few months. For
corn, a dominant feature of export demand is that China’s corn crop was down
substantially from last year due to drought, high infestation of corn borers,
and a shift of acreage into soybeans.
China has been the world’s second largest corn exporter most of the time
since the early 1980s, except for 1994-95 and 1995-96. In the latter year, lack of Chinese exports
was a major factor pushing corn prices to new record highs. The 2000 average Chinese corn yield is
estimated to be as low as in 1994, when weather problems took China out of the
export market for two years. However,
September 1, 2000 Chinese carryover stocks of old-crop corn were estimated to
be more than double those going into the 1994-95 marketing year, and China’s
corn acreage was believed to be significantly above that of 1994 and 1995. China is continuing to make corn export sales,
but at a less aggressive pace than in recent months. Its total 2000-01 exports appear likely to be down 200 to 250
million bushels from last season. That
should create temporarily increased export demand for U.S. corn this spring and
summer. Feed grain exports from eastern Europe, the Ukraine, and the Southern
Hemisphere also are down because of adverse weather. The U.S. is projected to have 70 percent of the world’s corn exports
this year, up from 60 percent last year.
But for this to happen, the Starlink problem will need to be solved quickly.
Domestic
corn feeding will remain large and corn processing will continue to
expand. Increased demand should absorb
about three-fourths of the expected increase in this year’s U.S. corn supplies. Barring major 2001 weather problems, the
slight excess production is likely to keep cash corn prices in a range similar
to last season. However, spring and
early summer markets will reflect nervousness about low soil moisture supplies. A much of this season’s increased demand
reflects foreign weather problems, and should be viewed as temporary.
Uncertainties on the demand side are: (1) China’s import needs and (2) South America’s likely harvest next spring. China’s 2000 soybean acreage is estimated to be 14 percent above last year, due to a shift from corn and wheat into soybeans in response to lower corn price supports. China was the major reason for the strong increase in 1999-2000 U.S. soybean exports. Current indications are that its import demand will grow more slowly than last season. In much of South America’s soybean belt, soil moisture and precipitation prospects look favorable. Farmers in South America base soybean-planting decisions not on depressed U.S. harvest-time cash prices, but on May and July futures, which last fall were 70 to 77 cents above central Iowa cash prices and moderately above last fall.
Tables
1 and 2 show my projections of corn and soybean supplies, utilization,
carryover stocks and prices for the year ahead, and a look at 2001-02
supply-demand prospects with alternative yields. The 2001 corn acreage is slightly below last year because of increased
fertilizer and energy costs, and shifts from corn to soybeans.
Typical
on-farm corn and soybean storage costs are about 19 and 35 cents per bushel for
eight month’s storage, respectively, when all costs except bin ownership are
considered. Futures prices last fall
and into early December of 2000 offered modest net returns for corn storage
hedges for May-early June delivery, for farmers who understand and are
comfortable with use of futures market hedges.
Soybean storage hedging returns were positive during the harvest season,
but have been negative in recent weeks because of a strong basis. Recent corn
storage hedging returns at times have been slightly positive.
Soybean
LDPs are likely to decline this winter and in the spring as cash prices
strengthen. Corn LDPs have a modest
chance of turning positive for a short time in late February and early March,
due to price pressure from increased faarmer marketings. The 60-day lock-in feature for posted county
prices and the one-day lag in changing the PCP can be helpful in managing
LDPs. If you’ve taken LDPs last fall,
note that downward price risk is
greatest after May. Over the last 21
years, cash Iowa corn prices have declined 72 percent of the time or more from
one month to the next from May until October.
The same was true of Iowa average monthly soybean prices, except for
July, when the percentage of declining prices dropped into the mid-60s. Alternatives for dealing with the downside
price risk after the LDP has been taken include: (1) buying July or September
put options, (2) selling with hedges or forward contracts and purchasing July
or September call options to retain upward price flexibility, (3) selling on
minimum price contracts, (4) selling the grain and no longer retaining
ownership, or (5) using the marketing loan (ML) instead of the LDP. Uuse of the ML means you give up attractive
soybean LDP opportunities. If
you use Certificates to pay off MLs to avoid the payment limit, be aware that
the marketing loan gain is taxable, even though FSA does not send in a 1099 to
the IRS.
2001 Marketing
Plan
Plan to get an early start on your 2001 marketing program. Important elements include cash-flow needs for your business, financial risk-bearing ability, whether you will use CRC or Fall-price RA crop revenue insurance to insure lost bushels at harvest replacement value, and whether you will use forward pricing tools. These insurances can be important companion tools for pre-harvest pricing, by providing coverage to buy back oversold forward contracts or hedges if you have low yields. Over the last 25 years, spring new-crop prices for corn and soybeans have been above harvest time prices about 80 percent of the time. New-crop contracting or hedging in the spring involves risk of higher prices. One way to manage this risk is through call options purchases to retain upward price flexibility. Another way is to buy put options to establish a price floor, while retaining upward price flexibility. This is an alternative to forward contracting. Forward contracting locks you out of the upward price flexibility. The 20 percent of the years when prices rose from spring to fall were years of widespread adverse weather across the Midwest.
What to Watch
Key indicators of corn price prospects this winter include (1) USDA’s January 11 revised crop estimates and stocks reports, (2) weekly export sales reports (on Thursdays), (3) Chinese corn export patterns, and (4) Starlink developments. For soybeans, the USDA reports, Chinese purchasing patterns, and South American crop conditions will be major influences on winter and spring prices.
What to Plant in 2001?
Cropping decisions will be a bit more complicated this year because of the steep rise in nitrogen and energy costs, as well as the Starlink problem. While Starlink is no longer a planting alternative, two major U.S. corn processors, through radio spots, have cautioned farmers spots to plant only varieties that are approved for all uses world-wide. Some varieties of GMO corn are not approved in the EU, and are unlikely to be approved in the coming year. Processor warnings reflect (1) efforts to protect the large EU corn gluten market, and (2) talk from one or more seed companies about targeting EU-unapproved varieties into the western Corn Belt, where there is extensive livestock feeding. The targeting strategy is similar to the one used with Starlink last year. Producers may also want to watch Japanese and South Korean market developments closely as the respective March 1 and April 1, 2001 dates for implementing their mandatory GMO labeling are reached. If you order non-GMO seed and decide before planting time to shift to GMO, it is likely to be easy to make that type of shift. However, the opposite type of shift may be more difficult to make.
High fertilizer costs, where agronomic considerations permit, may encourage a shift from continuous corn to soybeans. There also is some talk of using fewer chemicals and more cultivation to reduce input costs. However, for many farmers, high fuel costs and the number of acres farmed may limit the feasibility of such shifts.