Feedgrain Market Outlook

Vol. 21 No. 5 - January 27, 2012 - PDF format

Market Situation

Drought.  Production losses from South America due to heat and drought continue to provide fundamental support for grain markets.  At this point it does not appear that the current drought is as bad as the 100-year drought of 2008-2009 that cut Argentine crop production by 37%.  But drought maps show the drought has intensified over central Brazil’s main soybean areas and Argentina over the last month.

2012 Battle for Acres.  Prospects of lower corn and soybean production in South America heighten questions over planted acres in the U.S. this spring.  According to Midwest crop budgets the last several years, it takes a soybean to corn price ratio of about 2.5 to equate returns from growing soybeans to corn production.  In years in which the March soybean:corn price ratio is about 2.5, corn and soybean acreages are closer together.  In years in which the soybean:corn price ratio is closer to 2.0, corn acres increase relative to soybeans.  The ratio this week is just under 2.2, trending higher the last few weeks, but still favoring an increase in corn acres for 2012.

Export Sales.  U.S. corn export sales for the week of January 19 were 38 million bushels, the second week in a row above the year-to-date average of 27 million.  USDA raised its estimate of 2011/2012 marketing year export sales in the January WASDE on corn production concerns in Argentina.  In order to meet the revised goal of 1.65 billion bushels, weekly sales need to average 35 million from now to the end of August.  The nearby futures price relevant for next week’s export sales report is $6.20, up from this week’s $6.02.

Outside Markets.  The Federal Reserve Board and Federal Open Market Committee released their summary of economic projections on Wednesday.  These projections provide the background for the Fed’s decision to keep the federal funds rate steady and “exceptionally low” at least through late 2014.  Looking forward, Federal Reserve Board members and Bank presidents expect GDP growth to continue to increase in the 3 to 4 percent range by 2014.  The unemployment rate is projected to continue to decline to around 7 percent over the next two years.  Inflation is projected to remain steady around 2 percent (http://www.federalreserve.gov/newsevents/press/monetary/20120125b.htm).

The Commerce Department released its 4^th quarter estimate of U.S. GDP growth at 2.8%.  Of concern is the degree to which this increase over summer’s 1.8% rate of growth is due to a buildup in inventories, a factor that may inhibit growth in 2012.  For all of 2011, the preliminary estimate of GDP growth stands at 1.7%.

In Europe today, optimism emerged over a report that a deal to restructure Greek debt was very close and the yield to finance Spain’s 10-year debt obligations fell to below 5%.  This news provided a boost to the Euro relative to the dollar.  The trend in copper prices portends economic optimism and crude oil continuing to trade either side of $100.

Marketing Strategies

2012 Corn Marketing Plan.  If corn demand in the 2012/2013 marketing year holds steady with the January 2011/2012 estimate (12.655 billion bushels), planted acres of 86 million at the trend line yield of 160 bushels would leave ending stocks unchanged.  If the national corn yield is once again around the -5% of trend (about 150 bushels), 91 million planted acres is needed to keep stocks constant.  If we plant 94 to 95 million acres of corn and use is unchanged, a yield above 145 results in increased ending stocks.  I look for an increase in corn acres in 2012, and assuming anything close to normal growing weather for this spring and summer, I have a  negative long term outlook for corn prices.

My marketing plan calls for pricing 20% on pre-planting price activity related to South American production concerns and the battle for acres; 20% on early season crop conditions; 20% around the time of the June Acreage report and Grain Stocks; and 20% around tasseling and the August Crop Report.  The final 20% will be sold at harvest.

Mark Welch
Texas AgriLife Extension Economist
401 C Blocker Building
TAMU 2124
College Station, Texas 77843 
Tel. (979)845-8011
Fax. (979)845-4906
JMWelch(at)ag.tamu.edu

^{The opinions and recommendations expressed are solely those of the author and are intended for educational purposes only as part of the Texas AgriLife Extension Service.  Texas AgriLife Extension Service assumes no liability for the use of this newsletter.  Educational programs of the Texas AgriLife Extension Service are open to all people without regard to race, color, sex, disability, religion, age, or national origin.  The Texas A&M University System, U.S. Department of Agriculture, and the County Commissioners Courts of Texas Cooperating}