Ray Grabanski: Can corn hit $3, and beans $5.50 by June 15?
By Ray Grabanski Progressive Ag president
4/07/2006, 11:42 AM CDT
It's not often that corn and soybean prices move different directions, as usually weather that impacts soybeans also impacts corn the same way with the growing regions very similar. However, last Friday's USDA report created the possibility of a 40 cent rise in corn prices at the same time as soybeans could drop 60 cent. Yes, under extreme circumstances it is possible for these two commodities to move in different directions.
The first event that could cause this unusual price movement has already occurred via the USDA March 31 intended acreage report, and increases the Pro Ag guesstimate to a 50% chance that we could see $5.50 Nov. soybeans (a 60c price drop from Friday's report to June 15) and $3 Dec corn (a 40c rise from Friday's report to June 15.)
USDA shocked the grain market recently with one of the largest acreage surprises since the 1983 PIK program. Traders vastly underestimated the impact of high energy costs on growers' 2006 planting considerations, guessing that only a 1% drop in corn acreage and 2% rise in soybean acreage would occur. Instead, the actual report found 5x the corn acreage cut, and 4x the soybean acreage rise. That surprise will largely impact the projected carryout stocks in future USDA reports, with Pro Ag calculations indicating a 400 mb cut in corn 2006/07 carryout (to 1.3 billion) and a 100 mb hike in soybean carryout (to 670 mb). We need to reverse this trend, or in 1 year the soybean carryout will match corn!
Obviously this cannot happen, so the market's job will be to make sure we don't keep increasing bean carryout and cutting corn carryout, and that will mean rising corn and declining soybean prices. The push and pull of this opposite price direction will be fought out daily in markets (as it has this week), as some people will not believe that this can continue to happen. But happen it must, as now its up to price to allocate the corn shortage and bean surplus through the demand side of the market. Lower bean prices will mean more U.S. soybean use, and higher corn prices will mean lower corn use. That's exactly what the market needs to accomplish over the course of the next year.
Some people believe prices can move enough to change farmers planting intentions yet in 2006, attracting more corn and subtracting from soybean acreage. Acreage shifts due to price changes are generally not very substantial historically. Typically acreage shifts from the March 31 report have a lot more to do with weather (late planting means more soybean acreage, early planting means more corn acreage) than with price. Pro Ag believes weather right now supports that happening in 2006, which brings up the second factor that can support $3 corn and $5.50 beans - adverse spring planting weather.
If corn planting is delayed this spring such that planting progress of corn is behind average through the planting season, its likely that even greater corn price rises and soybean price declines occur. What happens if another million acres of corn switch to soybeans due to late planting in 2006? So far, the 2006 spring has been wetter than normal in the corn belt, not drier than normal.
Rain has fallen at regular intervals in the corn belt since March 1, with subsoil moisture replenished almost to the point of being at or above normal levels entering the planting season. Topsoil moisture is wet across most of the corn belt, leading to the first report of the season showing planting at normal levels (and even behind in some crops). That's drastically different than the March 1 drought outlook the market was anticipating. If this continues, that will fuel the fire in corn, and throw tanker loads of water on the bean market.
Any further planting delays in the corn belt will push corn prices closer to $3, and beans closer to $5.50. Even a small planting delay in the corn belt this spring can push corn to $3 Dec futures, and beans simultaneously to $5.50 or lower Nov. futures. That provides additional reason for corn and soybean growers to look to the sky for further information on 2006 corn/bean marketing plans.
Have wheat prices topped?
Wheat prices dropped hard in mid-March after forecasts of widespread rain moved across the winter wheat and corn belts. Since then rains have continued in the corn belt, replenishing soil moisture levels there and in the northern winter wheat belt (SD, NE, and MT). However, this week its drying out somewhat in KS, OK, and TX- the states with the worst winter wheat crop condition ratings. That along with a bullish USDA intended acreage report Friday (1 million smaller wheat acres than expected) pushed wheat up this week to regain 50% of the 50 cents late March price drop.
The 50% retracement of the recent break might be a great place to price some 2006 wheat sales, especially considering that even KS, OK, and TX winter wheat conditions are improving from the March rains. HRS wheat planting conditions might be as good as they've been in years, with only isolated flooding in eastern ND occurring (where more corn/beans are being planted). The western and central Dakota's/MT may have the best moisture levels in years, so as long as planting isn't delayed, yield potential might be very good.
As always, weather is the most important consideration for wheat yields, with the most critical time for winter wheat coming in the next 6-8 weeks. If weather continues to improve, we might very well have topped the wheat market for 2006.
The only bullish factor left is the inflationary impacts of the surging gold and silver market, spiking to new highs again late this week. The surge helped lift grain prices Thursday as the metals ran to new 25 year highs. Inflation is the remaining bullish threat to commodities today, and if weather turns it might not take as much to push grains higher given the rapid rate of inflation in outside commodity markets.
Have Cattle prices hit an intermediate bottom?
Fat cattle futures dropped $18 to lows this week from Jan 11 to April 4 before bouncing back. This is the first serious sign that cattle prices have topped since the Mad Cow/BSE/Canadian import ban impacts of a few years ago. Feeder cattle futures dropped $16/cwt as well, and even hogs dropped $16 into today from early December. The recent bloodbath indicates cattle have finally formed their 10 year cycle highs, and are headed lower for the next few years. This means producers will need to be aggressive sellers of the next bounce higher in cattle prices. With an $18/cwt drop in fat cattle and $16/cwt drop in feeder cattle, a 50% retracement of $9/cwt fats and $8/cwt feeders might be the most we can expect. We'd like to see hedgers start pricing cattle at a 33% retracement of these highs, or a $5 rally in fats/feeders. Plan to be 100% hedged the next few years production if we get the full 50% retracement of the recent break. Pro Ag is very concerned about declining cattle markets over the next few years, but we should get a bounce in the next 1-2 months first of which cattlemen will need to become aggressive sellers.
Hogs may see a similar pattern, although this meat market hasn't shown any signs of a bounce yet.
