West Kentucky Grain Market Project
Monthly Market Update for June 2006
June 15, 2006
Since early December 2005 corn and wheat futures markets prices for 2006 crops have exhibited a steady uptrend to price levels well above those of most years while soybean prices have posted a modest recovery from harvest lows but have been mostly sideways.
The wheat price rally has been based on global production and consumption estimates for the 2006-07 marketing year that indicate a decline in production while demand remains robust. If the current projections are reasonably accurate global wheat production will fall short of consumption for a second consecutive year and, more importantly, below consumption for eight out of the past ten marketing seasons. It is difficult to accurately measure global wheat stocks. However, USDA maintains their current estimate of 2006-07 ending global wheat supplies will remain at the lowest level on record for the past 25 years. In addition to surging global demand for wheat, futures market prices have been propelled by the devastating drought in several of the major U.S. hard-red wheat producing states.
The "unbridled enthusiasm" for corn prices is based on an expectation of structural change in the corn market. The major part of this structural change is the relatively new use of corn as a fuel source as compared to a history of corn being primarily a food or feed source. The second factor, which has been predicted for many years but has still not occurred with any regularity, is the eventual need for China to become a consistent net importer of corn from the world and primarily from the U.S.
Total disappearance of U.S. produced corn first topped 9 billion bushels during the 1998-99 marketing year and it took 5 years, until the 2003-04 marketing year, to exceed 10 billion bushels of disappearance. It took only two more years (the current marketing year 2005-06) to reach a projected total disappearance of 11 billion bushels of U.S. corn.
This was accomplished via solid growth in demand and consumption of meat and therefore consumption of corn with feed use of corn up 500 million bushels or 10 percent above the 1998-99 level (feed use is still the single largest use category on the balance sheet). However, corn used to produce ethanol fuel exploded from 526 million bushels in the 1998-99 marketing year to a currently projected 1.6 billion bushels in the 2005-06 marketing year which will end August 31, 2006.
In their first forecast of a corn balance sheet for the 2006-07 marketing year USDA has projected corn for ethanol use at 2.150 billion bushels and total disappearance of U.S. produced corn at 11.645 billion bushels. Market expectations seem to be that corn ethanol use will continue on a robust expansion path for at least a few more years. If the U.S. can produce the corn supply market analysts are projecting total corn disappearance to approach 12 billion bushels for the 2007-08 marketing year.
Record U.S. corn production to-date totals 11.8 billion bushels (2004 harvest). This harvest occurred with a record yield of 160.4 bu/acre on 73.6 million acres. Farmers planted 80.9 million acres of corn for all purposes in 2004 (corn for silage is the big difference between planted and harvested for grain acres). The most acres planted to corn in the U.S. over the past 30 years were 1976 when farmers seeded 84.5 million acres to corn for all purposes.
The current corn balance sheet from USDA indicates less than 1.1 billion bushels of corn will be left in the U.S. by harvest time 2007 while disappearance will have grown to a record setting 11.6 billion bushels during the 2006-07 season and market expectations will be for a further increase in use for the 2007-08 marketing year. This is a very modest carryover level relative to use based on historical comparisons.
Therefore, either the 2006 corn crop will need to be larger than the current estimate of 10.6 billion bushels or corn production in 2007 will need to expand in a major way or corn prices will have to go high enough to ration use, especially during the 2007-08 and probably the 2008-09 marketing season's.
For a farmer trying to manage price risk this is a long way into the future and a lot of "what-if" is involved. What happens to the price of oil, trade relations especially with China and a new Farm Bill, not counting weather could substantially alter market expectations about corn, soybean and wheat price outlook.
The soybean price outlook over the next 6 months is one of large supply and modest prices unless weather intervenes. After January 1, 2007 the question of crop size in Brazil and the fight over corn, soybean and spring planted crop acres will be a major factor.
In addition to crop insurance, farmers should consider the use of options to manage some price risk. Current prices for corn and wheat are high by historical comparison (even though wheat prices have fallen sharply recently) and with good weather between now and fall harvest, corn and soybean prices should weaken from current levels. However, the above story implies the real possibility of even higher prices, especially for corn and to a lesser extent soybeans. Don't be afraid to price for fear of selling too cheap. These contracts can be covered with the purchase of calls or call spreads. Don't forget about buying puts; these can be 'rolled-up', for an added cost, if prices explode even higher. Dont forget about the possibility of using an option window for stored grain to provide both a minimum price and a maximum price while one waits for the basis to improve. Given what is likely to be very wide harvest-time basis for corn and soybeans, as it currently is for wheat, consider adding storage capacity. It is not often that a farmer has the opportunity to pay for a major portion of capital construction projects on the farm in one or two years.
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.