As has been the case in every month for the past four years, analysts and market participants will be watching tomorrow’s USDA Crop Production and World Agricultural Supply and Demand Estimates reports quite closely for any information that will clarify the market situation for corn, soybeans and other grains. The situation was made a bit more uncertain by the Sept. 30 Grain Stocks report, which indicated the Sept. 1 (i.e. year-end for the 2010-11 growing season) corn inventories were significantly higher than expected. That says high prices did their job of rationing available supplies over time.
Yield reports have been mixed with anecdotal information in the eastern Corn Belt indicating generally lower-than-expected corn yields, while those in the western Corn Belt indicate higher-than-expected yields. As Figure 1 shows, the analysts surveyed by the three major wire services last week are looking for a slightly higher national average yield (148.7 to 148.9 bu./acre) than last month’s 148.1 bu./acre estimate from USDA. But, they have the 2011 crop pegged slightly lower than USDA’s August estimate, presumably due to lower harvested acres. USDA did not change that number in the August report when many expected them to do so.
Drought conditions in the southwest and south and late-season dry conditions in the southern Corn Belt states suggest that the number of acres harvested for grain could well have declined.
Whatever Tuesday’s report says, it will not diminish this buying opportunity in my opinion. December corn futures have fallen from $7.75/bu. on Aug. 30 to $5.80/bu. last Tuesday. That is a 25% decline. July futures (Figure 2) fell from $7.94 to $6.06/bu. (down 24%) over the same time period. Ditto for soybean meal. And all of that happened as USDA’s corn and soybean crop estimates both got progressively smaller!
Adjusting to the Crude Oil Market
I still believe a major reason was that the corn market had to be reconciled to a lower crude oil market. While ethanol margins remained positive, ethanol prices have fallen from around $3.00/gal. in early August to $2.80/gal. at the end of August, then to just less than $2.50/gal. last week. Distiller’s dried grains with solubles (DDGS) have been about steady as the downward move in corn has been offset by a normal upward seasonal trend in the ratio of DDGS price to corn price. But the $0.50/gal. lower ethanol price has shaved $1.40 or so per bushel from the price that an ethanol plant can pay for corn. Figure 3 shows the corn futures price was way out of whack with crude oil futures at the end of August. That is no longer the case and it now raises the question of whether there is much more bottom-side potential for corn prices. That depends largely on tomorrow’s report.
Feed Cost Volatility Tempers Profits
And meanwhile, hogs have enjoyed a counter-seasonal rally across the board. Since bottoming out the week ending Sept. 10 (Figure 4), the cutout value has gained roughly $4.00/cwt., while negotiated hog prices have risen by nearly $9.00/cwt., and the average price across all pricing methods has gained nearly $4.00/cwt. The last of those, of course, is influenced by contracted hogs that are priced on Lean Hogs futures as well as feed costs. Both of those tend to smooth the changes in the price that includes all pricing methods.
The changes in feed ingredient futures and Lean Hogs futures have had a dramatic impact on the profit outlook for the next 12 months and for 2012 (Figure 5). The twelve-months-out profit estimate has gone from deep in the red back in the early summer of 2011 to positive $7.25/head as of Friday. My first projection for all of 2012 showed over $13.00/head profit the week before last. That figure dropped slightly (to $12.65/head) last week as grain prices rallies a bit, but that number still compares very well to 2010, and would mark three years of modest profits should these futures prices actually hold.
One must always remember that the capital requirements are much higher now than they were before 2007, so even these reasonably good per-head profits represent significantly lower returns on capital than did similar returns before the rise in feed costs.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com