West Kentucky Grain Market Project
Monthly Market Update for October 2005
October 27, 2005
Even though corn futures contracts continue, almost daily, to set new contract lows and soybean futures contracts can’t seem to make up their mind if the harvest low is set or is yet to come, Kentucky farmers should take some comfort in the significant recovery in cash corn and soybeans prices. This recovery in the basis, i.e. cash prices increasing while futures prices remain flat or even decline, is due in large part to a significant drop in barge freight rates in the range of 35-40 cents per bushel and the slow winding down of harvest in our local markets leading to tight holding by farmers of remaining supplies.
Additional "good news" for farmers is that in spite of significant improvement in local cash prices LDP rates have not dropped by a corresponding amount -- as of today, rates are only 4-6 cents below their maximum to-date.
Market focus is still (for a very short while) on the supply side with traders expecting USDA to increase crop size estimates of corn and soybeans from last month's levels with the release of the November Crop Production report due out November 10th. If trader's expectations are correct it is likely that the larger corn and soybean crop estimates will also translate into an increase in projected ending stocks for next August 31, the end of the 2005- 06 corn and soybean marketing seasons.
Projected ending stocks of corn at 2.22 billion bushels, slightly more than 20 percent of current projected total use for 2005- 06, are quite large and will serve to limit futures market rallies of "old-crop" contacts (i.e. March, May and July 2006) and if projected ending stocks continue to increase in coming monthly USDA reports they will only become more of a burden to any price rally attempts.
However, record setting use of corn, especially for ethanol production and projected robust exports, should provide for seasonal improvement in prices, especially cash prices, as farmers should become tight holders of their remaining un-priced grain inventory. Therefore, farmers need to be paying attention to the weekly export sales report, issued each Thursday, and the export inspections report, issued each Monday. They also need to watch for the data on monthly ethanol production. These reports need to validate USDA's projection of 2 billion bushels for corn and 1.115 billion bushels of soybeans in total annual exports and 1.5 billion bushel of corn used in ethanol production for the market to stage much of a recovery.
By spring the market should become concerned about the number of acres likely to be planted to corn vs. soybeans and other spring planted crops. There should be much discussion of the cost of producing corn due to higher energy cost impacts and for soybeans the question of Asian Soybean Rust and the cost of managing this disease should also re-emerge.
For soybeans, USDA's current projection of ending stocks of 260 million bushels (stocks/use ration of 8.8 percent) should probably be characterized as "very adequate but not yet cumbersome". If the crop gets bigger in November and/or January, when the "final" crop size estimate is released, and/or exports are disappointing, projected stocks could exceed 300 million bushels (10+ percent stocks/use ratio). It is likely the market would view this as an excessive amount of carryover stocks. The last time the U.S. soybean stocks/use ratio exceeded 10 percent (1999-00 marketing year) U.S. soybean prices averaged only $4.63 per bushel for the entire marketing year.
For the recently concluded 2004-05 soybean marketing year the final stocks/use ration was 8.6 percent and ending stocks were essentially equal to the current projection for this marketing season. The season's average price for soybeans last year is now listed as $5.74 yet, interestingly, USDA is projecting the 2005-06 average price to range from $5.00 -- $5.80, midpoint of only $5.40. Given that USDA is projecting more U.S. soybean exports in the current season than last year and equal domestic crushing demand one must conclude that USDA is expecting Brazil to have no problems with this year’s crop as they have the past two seasons.
Currently traders seem to be expecting Brazil to produce a soybean crop of about 54-55 million metric tons (mmt) compared to USDA's October estimate of 60 mmt. The Brazilian record of 52 mmt (1.91 billion bushels) was set with the spring harvest of 2002.
Many market analysts also seem to think U.S. soybean acres will increase next spring at the expense of corn acres.
If 2005-06 U.S. soybean ending stocks exceed 300 million bushels and Brazil produces a record shattering large crop in the spring of 2006 (Argentina is also forecast to produce a record large soybean crop in the spring) and U.S. farmers increase soybean plantings by 2-3 million acres, soybean price prospects are not encouraging. There is still downside risk from owning 2005 soybeans and farmers should get serious about price prospects for the 2006 crop.
Of course weather could easily make all of these what-if's a moot point and soybean prices could become very strong. Therefore, this author is once again recommending farmers give serious consideration to the use of options or options in combination with contracts to provide downside price protection yet allow for the opportunity to gain at least a portion of any significant price rally.
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.