West Kentucky Grain Market Project
Monthly Market Update for November 2006
November 15, 2006
Since mid August cash corn prices in Kentucky have risen from the low $2.00 area to more than $3.50 per bushel. Chicago Board of Trade (CBOT) futures prices are currently trading at levels not seen since the July 1996 contract topped $3.75 in mid February 1996. CBOT contracts ultimately traded to an all-time high around $5.50 in July 1996 while cash prices in Kentucky reached $5.35 -- $5.50 in some locations for several days in early July.
There has been only one period of cash corn prices in Kentucky above $3.00 since the phenomenal period of October 1995 to October 1996 when cash corn prices were consistently between $3.00 and $5.50. That occurred from mid March 2004 through the first week in May 2004 when corn priced ranged from $3.00 to $3.30 per bushel. Corn prices are clearly in the upper reaches of their historic range, yet there may be room for them to go higher.
The fundamental supply/demand news is fairly well established until January 12, 2007 when USDA will issues "final" crop size numbers for fall harvested crops, the Winter Wheat Seedings Report, the First Quarter Stocks Report and the World Agricultural Supply and Demand Estimates (WASDE) report. These reports collectively will define total feed grain and soybean supply available for consumption during the 2006-07 marketing year, provide an assessment of the rate of consumption during the first quarter of the marketing year (September 1, 2006 – November 30, 2006), provide the first quantifiable measure of how many acres were seeded to winter wheat for harvest next summer and update the world numbers on production, consumption and trade. Obviously the January “reports” will be very important to future market direction.
Between now and January 12, 2007 the main items of quantifiable market data that will be available include weekly export data for the U.S. – grain inspected for exports at U.S. ports for the week, the prior week, the same week one year earlier and the cumulative total for the year compared to the cumulative total on the same date one year earlier (issued on Monday am) and the weekly Export Sales Report issued on Thursday. These will be used by the market to gauge demand strength. Additionally, the market will be monitoring the monthly data for soybean crushing's and ethanol production – two major domestic users of corn and soybeans.
The corn market appears to be the key to the entire grain complex. The rally started with wheat due to a major short-fall in global production in the face of significant and consistent expansion in consumption (lead by strongly growing economies in China and India).
Currently, it appears that world wheat producers are responding robustly to $5 plus wheat prices by rapidly expanding acreage and the Northern Hemispheres crop looks to be starting off in good condition. The near record tight projected ending stocks of wheat for the current marketing year will support wheat prices well until the market is assured that global wheat production will rebound strongly next year and allow for some rebuilding in safety stocks levels. As long as the "new-crop" wheat looks good wheat prices should remain in a side-ways trading range well above average prices of the past decade, however, prices should not set new highs and wheat will therefore not be the market leader.
The situation for soybeans is fairly straight forward. The U.S. has probably harvested the largest soybean crop in history, demand is robust and expanding, but surplus stocks should build to a new record large number and South America is currently forecast to produce a new record large crop next spring. However, concern about expanding global demand for soybeans and increasing use of soybean oil to produce energy coupled with concern that "too" many acres in the U.S. next spring will be switched from soybeans to corn is providing a major underpinning to soybean prices – corn is the key.
The corn situation is also well documented – third largest crop in history but nearly 1 billion bushels less than consumption, resulting in a sharp draw down in projected ending stocks to well under 1 billion bushels (currently 8.4% of use and second tightest on record). Additionally, several market analysts are already on record that the USDA January reports will results in an even tighter balance sheet for corn.
The market is trying to provide the proper incentives for current use rates and also call forth sufficient corn plantings next spring to provide for another projected strong increase in consumption in 2007 and 2008 and perhaps 2009 lead by continued expansion of corn ethanol processing and at least stable feed use and exports.
There may not be a good analog model to forecast corn prices in the current situation. Most corn price rallies are a result of crop problems and or government intervention. Perhaps 1972 and the Russian grain purchases is as good a model as any. The USSR drug the U.S. into the large global commodity trading country it would become. Corn prices from 1951 up through 1972, using season average farm prices as the measure, ranged from a high of $1.66 in 1951 to a low of $1.00 in 1960 (average of $1.23 nominal).
Starting in 1973 corn price was $2.55 per bushel and prices did not drop below $2.00 until the then record setting large crop of 1986. In most of those years from 1973 until 1986 average farm prices were roughly $2.50 per bushel (actual average over the period $2.56 nominal). In three "short crop years" prices were well above $3.00 while in a couple of "large crop years" price was $2.02--$2.25. A "bear" might say corn price increased $1.00, a "bull" might say corn price doubled.
Notice price did eventually drop below $2.00 (six times since 1986) with a nominal seasonal average over the period of $2.25 per bushel.
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.