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July 1, 2010
USDA released its June Acreage Report and the June Grain Stocks report Wednesday. Overall, 2010 planted acreage in the 21 principal crops is estimated at 318.9 million acres, down 360,000 acres from 2009. Corn acreage (87.872 million acres) was 1.6% higher than last year, but 928,000 acres fewer than corn growers indicated last spring. That’s partly due to excess moisture conditions in mid-May that limited some later corn plantings, while high corn-input costs and a corn-soybean ratio favoring soybeans likely prompted some shifting of acres to soybeans.
Planted soybean acres for 2010 are estimated at an all-time high of 78.868 million acres – 1.8% higher than 2009 and 800,000 more acres than grower planning indicated in March.
The quarterly Grain Stocks Report shows June 1 corn stocks at 4.31 billion bu., 288 million bu. fewer than the average trade pre-release estimate. It implies usage of 3.38 billion bu. from March through May, up about 25% from the March-May 2009 disappearance, thanks partly to ramping up of ethanol production.
June 1 soybean stocks were also lower than expected. At 571 million bu., the actual stocks were 23 million bu. lower than expected.
While the reports leave livestock producers with less certainty on feed input prices and the prospects of paying higher prices, it isn’t "too late" for livestock producers to lock in feed needs. Writing for the Livestock Marketing Information Center (www.lmic.info/) this week, Darrell R. Mark, University of Nebraska-Lincoln ag economist, says that among the bullish factors that could drive corn prices higher are:
The lower-than-expected acres and higher usage rates.
The slight downturn in crop condition ratings in the past week, likely thanks to flooding and hail damage to corn in the Western Corn Belt in the past couple of weeks.
The potential for the Environmental Protection Agency to increase the ethanol blend rate to E12 or E15 this fall.
A potential shift in weather pattern from El Nino to La Nina, bringing hot, dry weather conditions to the Midwest grain belt in the critical July-August crop period.
On the other hand, Mark says bearish corn market factors that could work in livestock producers' favor include:
Planted corn acreage is the second-largest in decades, and USDA's current trendline yield forecast of 163.5 bu./acre is viewed as conservative by many crop analysts. A record 2010 harvest is possible.
Despite corn demand growing, the cattle and hog industries continue to contract, thereby reducing feed usage. Plus, tighter margins recently for ethanol producers and the prospect of an expansion to only E12 instead of the expected E15 will limit corn demand in that industry.
Outside market influences (e.g., energy prices, stock market, and currencies) haven’t been particularly supportive to corn prices.
Livestock producers still have opportunities to lock in corn needs. Buying cash corn on price dips and a weak basis to hedge a portion of third- and fourth-quarter feed needs seems appropriate, Mark says. Plus, consider purchasing call options to establish a ceiling price. A less expensive option strategy would be to purchase call options and simultaneously sell put options with a higher strike price to create a "purchase" window, or fence.
“Another possibility is to consider other feedstuffs in place of corn. In the past month or two, the wheat-to-corn price spread has created an incentive for some feeders to bring wheat into feedlot rations, particularly in the Southern Plains where low-protein wheat has been plentiful. In fact, this week’s acreage report was bearish for the wheat market, with USDA reporting all wheat planted acreage for 2010 was 54.3 million acres, 480,000 acres more than what the trade expected. Further, June 1st wheat stocks, at 973 million bu., were about 33 million bu. more than expected.”
While Mark says Southern Plains feeders may look toward wheat as a corn alternative, Northern Plains feeders will likely look toward corn-milling co-products, especially distillers grains (DGs) and gluten feed. Wet DGs are trading at about 60% of the price of corn (dry matter basis) and dried DGs are about 75% of the corn price.
Mark offers one additional note of caution for Northern Plains feeders in Iowa, Nebraska, and South Dakota, which saw the largest declines in corn acreage relative to last year. Thus, he says, local supplies of corn grain are likely to be smaller this year and basis will likely strengthen with smaller local supplies and stronger local demand from both ethanol production and additional cattle on feed in those states.
-- Livestock Marketing Information Center
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