A Game-Changer for Agriculture

Once every so often, news comes along that causes investors to rethink entirely their take on a market. One recent example was last week’s move from the Chinese central bank when it once again shifted interest rates. Investors panicked over fears that the move might stifle signs of recovery. But by the weekend, investors had regained their nerves and this event turned out to be a nothing more than a storm in a tea cup.

But what to make of last week’s United States Department of Agriculture report, which turned the grain futures markets on their heads sending prices plunging harder and further than even the pessimists had expected? It’s this kind of game-changer that turns investing on its head. For some time we’ve been rather bullish on basic food prices, but the USDA report leaves us, like most others wincing in its aftermath. Let’s look at each of the major crops starting with corn. We’ll review wheat and soybeans but since rice is not well traded in Chicago, we won’t discuss below. The following factors are key developments that our network of traders considers when devising trading decisions for our Jurojin Weekly futures trading service.

Corn – Production was up by a larger-than-expected 8.8% according to the USDA report sending its price reeling the most since June last year. Prices for March delivery corn futures that had been trading at $4.21 per bushel earlier in the week closed at $3.71 on Friday.

Surging prices in 2008 encouraged farmers to boost production in search of greater profits. Now it looks like there is supply every which way you look, making a continuation in the decline look inevitable. Two straight years of record production is helping to boost projected reserves to the highest since 2002. USDA predicts the combined overhang of corn, soybean, wheat and rice inventories will jump 8.3% over last year’s stockpile.

Excess supply like this really tosses the ball back into the court of buyers who can refrain from buying up more than they need for immediate use in the face of many willing sellers.

The USDA said that U.S. farmers harvested a record 13.151 billion bushels of corn, compared to 12.092 billion last year. But by December 1, farms and warehouses held more corn than they ever had done on that date with 10.934 billion bushels dwarfing the previous year’s 10.072 billion bushels.

Wheat – Rising wheat prices have taken a toll on demand sending inventories surging following record production created by the allure of higher prices from an earlier shortage. And while that sounds circuitous, it’s one of the intricacies that farm analysts and traders attempt to juggle in an effort to keep ahead of the game. Stockpiles rose 24% as farmers avoid late in the season damage to crops.

The price of wheat for March delivery on the CBOT, which in mid-November peaked at $6.05 per bushel closed the week just about at its weakest at $5.10 per bushel following incessant selling after the USDA report. To make matters worse, that price took out the weakest point seen during December, which invites further weakness in the week ahead. 

Wheat inventories held as of December 1st totaled 1.765 billion bushels making them almost one quarter higher than one year earlier. As a result farmers have planted the lowest acreage of the winter wheat crop since 1913. The 37.1 million acres is 14% lower than a year ago.
 
Soybeans – In early October the outlook for soybean prices looked pretty dire after a record harvest. However, worsening drought conditions in Brazil and Argentina, other major global suppliers was leaving the U.S. crop the bean of choice with China, the world’s largest consumer of soybeans. In fact since October 5th through last week, soybean prices left behind the healthy supply picture and prices rose 15% to $10.83 per bushel. At the start of January the price per bushel at the Chicago Board of Trade was as high as $10.75.

The USDA said last week that farmers last year had a bumper crop likely to reach 3.361 billion bushels, which is 1.3% more than its forecast a month ago and 13% higher than the entire 2008 crop. That means that stockpiles going into next season are already likely to be high. March soybeans closed the week out at $9.74 cents per bushel resting on precarious support as traders and farmers ponder the potential transition from famine to feast.

Not only did farmers plant 2.2% more acres with soybeans, but they also managed to yield a full 10% more per acre than in 2008. USDA estimates farmers planted 76.4 million acres with soybean plants. The report also predicts export demand will be 1.375 bushels for the marketing year that began September 1, while it expects U.S. processors to convert 1.71 billion bushels into oil. Together with starting reserves of 245 million bushels we make that a supply overhang of around 521 million bushels.

The impact of excess supply according to price predictions from the USDA is to reduce the average soybean price from $10.10 per bushel last year to $9.76 next year. Oddly enough the USDA has revised its price prediction for next year’s crop from $9.50 even in the face of projections for record crops from Brazil and Argentina. World production is likely to increase 19% from 210 million metric tons to 250 million tons. 

Could it be that the writing is on the wall for bean prices until this imbalance gets sorted out?

John Bull
The Secret Order of Jurojin

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