Philip Shaw

The August USDA reports came out today and boosted 2010 production for corn and soybeans.  In many of the years before this raising the production number in an August USDA report would put a punctuation mark on the final crop number and send prices in a downward spiral.  Not so in 2010.  It would seem that our markets are chasing headlines with regard to the wheat problems in Russia, but the way ahead seems insatiable for market bulls.

The USDA announced in their August crop production report that US corn production is projected at 13.365 billion bushels with a record yield of 165 bushels per acre.  Soybeans were projected at 3.433 billion bushels with an average yield per acre projected to be 44 bushels per acre.  I was a bit surprised by these numbers as many crop analysts earlier in the season were talking about too much rain.  The lesson we should learn is never doubt the resiliency of modern corn hybrids.  Increasingly as the years go by it’s hard or harder to get a poor yield with corn.

Market reaction was swift on Thursday as traders decided to focus more on usage versus the increase production numbers.  For instance in the corn market I have always talked about the dynamic demand eating up those big corn supplies.  For instance this year in the August report USDA is projecting 13.490 billion bushels usage for corn.  This was an increase from July as the USDA hiked old crop ethanol and food seed and industrial usage.  Ending stocks for old crop dropped to 1.426 billion bushels, for new crop it dropped even more down to 1.312 billion bushels.   So despite record crops projected in the Corn Belt, ending stocks continue to shrink.  The market continues to look for a price level to ration that demand to reverse those ending stocks.

The soybean numbers show similar characteristics except for the large export component, which continues to leave the United States.  The USDA boosted exports of old crop by 10 million bushels.  This took ending stocks down for old crop 160 million bushels and the new crop number down to 360 million bushels.  Many within the trade and our own DTN market analyst John Sanow question USDA understating this export number.  This means that the soybean ending stocks could be much lower, in fact 200 million bushels lower in the new crop year if exports continue on their current pace.

The wheat situation has been well documented and the market continues to chase the headlines in Russia.  We have seen a 10% decrease in the world ending stocks to use ratio in one month’s time, putting us at about 39%.  The fundamentals are still bearish but in many ways the fundamentals are simply comical.  In the white-hot conditions of a Russian flameout, wheat is simply bullish crazy.  Cash price bids in Ontario and other points in the US Corn Belt are much more realistic.  I had a guy ask me if he should sell his old crop wheat today and I almost dropped the phone.  Sell, sell, and sell!

It goes back to my old axiom, “ya never know.”   In the 2009/10 marketing year we’ve had three major events that have affected the market.  Two of those events in my mind were the January 12 USDA report and the subsequent June 30th USDA report which canceled out its previous cousin.  Of course the third event has been the Russian drought and the problems in Eastern Europe, which came out of nowhere.  From my perspective this complicates much of our fundamental analysis as many of us in the fields have taken advantage of higher prices, which no technician saw coming before it was too late.  Sometimes the possession of physical grain is 100% of the marketing commonsense.

Of course most of us don’t farm that way.  You have your grain hedged either through a broker or by yourself with cash grain contracts that can challenge the imagination.  I think the challenge ahead going into fall is to measure how much risk you are willing to roll the dice with.  I say that because it’s increasingly obvious that problems in Eastern Europe and Russia have not only taken down the wheat fundamental assumptions but they are beginning to press strongly on the corn and soybean complex.

Looking ahead, the market will start focusing on the fall harvest.  There will be lots of corn harvested in the United States in September.  I also suspect there will be some corn harvested in Ontario in late September as well as the bulk of the soybean crop.  This means that a certain point the market, albeit just briefly, will consider frost.  Of course nobody wants to go there, an early frost in 2010 would pound the market bears further.

Of course there is much more to consider, oil has got pounded in the last few days and with grains going up the smell test isn’t what it should be.  Yes, it is an uneven time. Marketing opportunities can be scarce this time of year.  Not so in 2010.  The market bulls are eyeing the hay.