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September 2009

SFO Magazine

Big Crops Get Bigger

By Darin Newsom, DTN Senior Analyst

The market has a lot of old adages: “Buy low, sell high;” “short-crop, long tail;” “be long, be wrong;” and my favorite, “bulls become steers.”

But this year another saying seems to be leading the herd: “Big crops get bigger.” Looking at private prereport estimates heading into the USDA report set for release Friday, Sept. 11, it certainly seems to be the case in corn and soybeans.

CORN

Not that the market needed more supplies. In August, USDA estimated the 2009-2010 corn crop would be the second largest on record at 12.8 billion bushels with an average yield of 159.5 bushels per acre. This was expected to create an ending stocks situation of 1.62 billion bushels, though due to expected record demand—both domestically and globally—the U.S. ending stocks-to-use ratio was calculated at only 12.6 percent, a solid decrease from the 14.3 percent projected in 2008-2009.

But if prereport estimates are any indication, these numbers could ultimately see a dramatic change. Tuesday, the brokerage company FCStone released its prereport estimates, increasing its corn projection to 13.02 billion bushels with an average yield of 162.7 bpa. The interesting thing about this is FCStone's estimate is not even the largest one out there heading into this next report, as others have called for an average yield closer to 165 bpa.

Doing a quick recalculation, leaving the projected record demand unchanged at 12.9 billion bushels and adding another 400 million bushels to production, U.S. ending stocks could climb to 2 billion bushels with an ending stocks-to-use ratio of 15.5 percent. Although this last number is still relatively tight, there is still something psychologically bearish about U.S. corn ending stocks of 2 billion bushels or greater.

Soybeans are seeing a similar trend in prereport estimates. FCStone projected production at 3.266 billion bushels with a national average yield of 42.6 bpa as compared to USDA's August projection of a record 3.199 billion bushels production with an average yield of 41.7 bpa. If realized and if demand stays unchanged, U.S. ending stocks could climb to about 275 million bushels. All of these numbers are quite sobering to possible market bulls, having the same effect as an elastrator ring.

But let's say it here first: A funny thing could yet happen on the way to the working chute. Starting with the corn harvest, the crop remains a long ways away from the safety of the bin. After visiting with producers at this year's Farm Progress Show in Decatur, Ill., it seems the crop, on average, is running anywhere from two to five weeks behind.

This means the crop remains vulnerable to a frost even on the average first-frost date over much of the key growing area of Iowa, Illinois, Nebraska, Minnesota and Indiana. And with ending stocks-to-use currently projected at 12.6 percent (as mentioned earlier) the market actually has little margin for error when it comes to production and total supplies.

SOYBEAN SITUATION

The soybean situation remains curious as well. U.S. ending stocks are expected to more than double, by some estimates almost triple, yet the futures prices from the November 2009 contract through the September 2010 contract read as follows: $9.51, $9.54 1/4, $9.54, $9.51 1/2, $9.58 1/2, $9.52 and $9.31.

Do you notice something peculiar about these prices? There is no carry in the futures spreads. In other words, the commercial side of the market remains concerned about supply and demand over the course of the 2009-2010 marketing year—at least for now.

In light of the bearish fundamental argument laid out above, the obvious question regarding this commercial outlook is: Why? The answers run the gamut. Acreage was never there from the start, as more corn was likely planted than what is being reported. (An argument that seems to have a certain degree of merit as you drive across Iowa and Illinois.) The soybean crop is facing so many disease threats this year (e.g., sudden death syndrome) that you would think it was wheat. Or despite numbers to the contrary, the crop is not as far along as the weekly crop progress report indicates, meaning it too is susceptible to a frost on or near the average date.

Taken as a whole, with all the cards left to play before harvest can be called complete, both corn and soybeans could yet disprove the old "big crops get bigger" saying. If so, then market bulls could yet have the last laugh. If not, that won't be laughter coming from the bulls.

Copyright© 2009 SFO Magazine. All rights reserved. Original Article