You have heard about the fog of war. That’s the time usually in the initial outbreak of battle where nobody really knows what the truth is. Nobody really knows who has the advantage. War can be so violent, that sometimes the first casualty can be the truth. On August 12th, when the USDA released the “prevent plant” acres for 2013, it reminded me of that. They said US farmers had been unable to plant 3.4 million acres of corn, 1.6 million acres of soybeans and 1.7 million acres of wheat. The market reacted reluctantly to the upside.
I say reluctantly because in many ways this put a fog in the market, somewhat like the fog of war. Earlier this week we had the USDA release lower production numbers for both corn and soybeans. The market was leaning the wrong way and prices pushed higher on the news. That was rescinded to some extent the next day but when traders saw the prevent plant acres this morning prices reacted back to the upside. We saw a commercial buying coming into the grain market and at the same time our noncommercial friends were getting quite tired of equities and saw a little bit of opportunity in grains. The outlook had grown foggy and it seemed price didn’t know where to go.
Earlier in the week the USDA had released their August 2013 report. In the August 2013 report, USDA pegged total US corn production at 13.763 billion bushels with a yield of the 154.4 bushels per acre. Soybeans were pegged at 3.255 billion bushels with an average yield of 42.6 bushels per acre. Both of these numbers were lower than the trade expected and markets went higher on the day.
Interesting to note prices and expectations were not the only thing that may have changed last Monday when the USDA released its August report. In many ways we were headed for a mega crop of all times of over 14 billion bushels. This bearishness had made itself part of the fabric of the grain market since spring. So with the USDA doing an about face with the prevent plant acres published today, market psychology is changing. This crop year may not be the bear everybody has been predicting.
Having said that, 13.76 billion bushels of corn is nothing to sneeze at. That will take some price movement to clear that from the books in 2014. The problem we have now in the grain market lies in the soybean complex. USDA also reduced soybean production for 2013. This is partly because of production problems, which are ongoing. In the Western Corn Belt at this present time it is getting very dry and we need some finishing rains to get those extra soybean bushels. If we do not get these rains, soybean futures will be pushed up and it will give Brazil the signal to plant many more acres in 2014.
In Ontario we are starting to have the problem of abundance. Over the last couple of years Ontario corn prices have been strong coupled with productivity increases. In other words, Ontario farmers are getting very good at growing corn with average bushel per acre yields above or on par with US corn belt states. This means that we find ourselves with about 350 million bushels of corn to dispose of at harvest time. The only way to get rid of it is to drop our price until our American friends will take it. That means we continue to have some of the cheapest corn in North America.
The question is do we want to produce corn for the cheapest price in North America? I sure don’t, but our current market structure almost insures that we do. We simply do not have enough domestic demand to handle the amount of corn being produced in Ontario. Ontario end-users are getting better at rationing that supply out into the United States to create the effect of export pricing all year around. Unless we have a production calamity here, import pricing may be a thing of the past.
Last year at this time corn was setting up to make its all-time futures high of $8.49 a bushel. We are a long way away from that now with the December corn coming in at $4.72 bushel. Is that cheaper based on where we’ve been or based on where we may go? For some end-users it must seem like the best of times considering where they have been. For others, it’s not so clear.
If the rain holds off in the Western Corn Belt for the rest of August and early September, soybeans may make things interesting. At the same time equities are losing their luster. Our Non-commercials investment friends are snooping around again almost uncomfortable without long positions. Yes, it is a time with fog in the market. Like the fog of war, at least at the moment, the market seems confused. Everything was so easy when the bears were grousing.