West Kentucky Grain Market Project
Monthly Market Update for August 2007
August 13, 2007
With the August crop report now history the market should be able to return to the major issues impacting price direction in the grain and soybean complex. The most immediate question is about production potential for U.S. soybeans. From a longer run perspective the important unknowns include: the response by South American farmers to very high soybean and corn prices, the response of farmers on a global scale to near record high wheat prices, the price of energy and finally the response by U.S. farmers on the question of the allocation of crop acres among the principal grain crops and soybeans for the 2008-09 marketing year.
The most recent USDA reports were broadly supportive of a continuation of high prices, at least from a historical perspective, as they continue to show very tight supply/demand balances at the global level for wheat and corn and they forecast a sharp draw-down in global soybean stocks. The significant drop in U.S. soybean plantings this spring coupled with continued rapid increases in global consumption of soybeans (and soybean products) leaves little room for production problems with the 2007 U.S. crop. The hot dry weather of the past two weeks and uncertain predictions about weather the next month have the market's attention. If soybean yield declines only 2 bu/acre from the August Crop Report projected ending stocks next August 31, assuming no change in consumption, would equal roughly 100 million bushels. The market should respond significantly if it appears such an event is likely. However, if weather turns less stressful very soon the large surplus left from the 2006 U.S. harvest and the prospect of a significant increase in South American production by next spring (5-10 percent increase in acres depending on the source) should serve to keep soybean prices from setting new contract highs.
For corn, the USDA's August World Agricultural Supply and Demand Estimates (WASDE) report was price supportive, in spite of the 214 million bushel jump in projected 2007 U.S. corn production from the July report; because it indicated a sharp jump in projected U.S. corn exports to meet global needs due to poor global coarse grain, corn and wheat harvest.
Grain markets are in an interesting time period – consumption is increasing in many countries due to improving incomes, energy is now competiting directly against food/feed needs for grains and world wheat production has not yet ramped up as corn and soybeans have. Corn, soybeans and wheat prices have probably moved to a "new level". This is not to say that farmers will be in any better shape financially going forward than they have experienced most of their lives – cost are increasing rapidly as well. Rather, it is to suggest that pricing targets contained in well designed marketing plans probably need to be reexamined. It is not difficult to examine the data to find earlier time periods when price levels migrated upward. It is also not too difficult to find that a market influenced industry responds rapidly to changing price signals and government policy.
If you thought the spring of 2007 was interesting for grain market participants watch the next couple of years. The market is responding, on a global scale, to the new situation. If energy demand for grains and oilseeds stays on-track (the price of energy and global government policies will be key) cropping patterns will continue to evolve. Prices for grain crops and soybeans are already being supported by expectations of grain traders about likely production and total consumption (with another huge increase expected in use of corn for ethanol) in 2008 and beyond. This outlook along with the record tight world wheat supply/demand balance is keeping a firm underpinning in the grain markets. This situation should allow farmers to store any un-priced grains and take a wait and see attitude. Stay alert on the soybeans. If the U.S. crop escapes August in decent condition and the South Americans dramatically increase acres prices could easily soften from their current lofty level. This is a case where the purchase of put options should be considered. Also don't forget about pricing the 2008 and 2009 wheat crops – currently futures prices are above $5.75 per bushel. They may go somewhat higher as the December 2007 Chicago contract seems set to challenge all-time highs but it will take further production problems in major producing nations to propel price much beyond current levels.
Finally, this is my last article for the University of Kentucky. I will retire from the University after 30 years and return to a small farm and a small consulting business. I wish each of you an exciting life. I can be reached at: steven645@gmail.com.
For More Information
The West Kentucky Grain Marketing Project: Monthly Market Update is edited by Steve Riggins. You may contact him by e-mail at sriggins@uky.edu.