Wednesday, September 3, 2014

What record crop will mean for planting intentions

By Chad Burlet

The month of August continued this summer’s pattern of excellent growing weather in the United States and for most of the northern hemisphere. By most accounts it has been the best weather in decades. We have now reached a point where the only thing that could prevent record U.S. corn and soybean yields would be an early frost. Not surprisingly, U.S. crop ratings have remained at or near record levels and most of Europe and Asia has maintained a steady flow of upward revisions to their crop estimates.

Excess rain during winter wheat harvest has led to a few quality problems in parts of the U.S. and France, but it has not hurt overall crop size. In fact, production estimates for corn, wheat and soybeans now reflect record global production for all three.

Wheat(CBOT:ZWZ4) and corn(CBOT:ZCZ4) prices had experienced the steepest declines during the late spring and early summer, so those markets consolidated in a sideways pattern throughout the month. The soybean(CBOT:ZSX4) market had been the slowest to break, but it began to catch up in August, losing more than 5% of its value. We still feel that soybeans are carrying a considerable risk premium and that they are the market with the greatest downside potential. Additional acreage switches from corn to soybeans have been confirmed for this fall in South America, and early U.S. surveys confirm that U.S. farmers will do more of the same next spring.

The market did get a small lift mid-month when U.S. Department of Agriculture’s Farm Services Agency released its “preliminary certified acres” report. There were as many different conclusions from the numbers as there were analysts, but the average estimate reduced corn plantings by 1.5 million acres and soybean acres by half that amount. We are reluctant to agree with that because the data is incomplete and also because it doesn’t explain what happened to those acres.

For a number of reasons Russia and the Ukraine remained a key area of focus for the wheat market. U.S. wheat futures(CBOT:ZWZ4) ebbed and flowed with each update of military activity or peace talks.  Interestingly, the prices in the Black Sea never rallied. In fact, they ended the month slightly below where they started. The two key reasons for the price weakness were the size of the crop and currency weakness.  Both Russia and the Ukraine enjoyed record yields and harvested crops that were 10% to15% larger than what was expected two months ago.  Those yields, along with their weak currencies, created a windfall for farmers who quickly marketed their grain.  Exporters were equally happy to move their stocks and both countries reported record shipments for both July and August.

The other country with a currency concern is Argentina. Years of misguided policies and an anti-agriculture tax regime have taken a severe toll on its economy. Now Argentina’s legal defeat in U.S. courts has put them in technical default. Their foreign exchange reserves are depleted and the unofficial “blue” exchange rate is 72% weaker than the official rate. The current administration would like to hold off devaluation until after the October elections, but they may not be able to hold out.  When the devaluation does occur there will be a big round of selling by farmers who have been holding off sales as long as possible.

There have been a number of other factors that have contributed to the bearish tone in world prices.  China continues to de-stock via weekly auctions of corn and soybeans, and they are using a variety of different means to block feed grain imports. The Indian monsoon improved greatly and Asian palm oil production far exceeded expectations. In addition, Brazil has initiated their Pepro program where the government buys cheap corn in the interior and subsidizes the transportation to move it to the ports.

Looking ahead to this fall we see a number of interesting opportunities. The continuation of the bearish soybean market will be a major theme. We also expect soybeans to lose ground relative to corn. In addition, wheat is starting to become expensive to corn and the financial incentive for farmers to double crop winter wheat and soybeans vs. planting corn is becoming meaningful. It is not yet time to place the “long corn” leg of any spread, in fact it maybe another 30 or 60 days before this record crop is fully priced.

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