Blogging by the Bushel
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Archive for September, 2012

The technical case for $6.76ish corn… December Corn chart has a gap that fills at $6.76. Meanwhile, in early July, the weekly continuation chart left a gap between $6.76 ¼ and $6.79 ¾ vs the CN contract. What gets us there?

By: Ed Clark, Top Producer Business and Issues Editor

History suggests agriculture is destined to cycles

Since 2008, corn and soybean producers, for the most part, have enjoyed a Cinderella run. After three years of record corn prices, this year was supposed to be a correction year, with prices near $4 per bushel. Then one of the worst droughts since the Dust Bowl occurred and there’s talk of $9 corn before it’s all over.

The fairy tale can’t last forever, right? Will black swans emerge on the horizon that suggest this boom cycle, the fourth in the past century, is about to bust?

“History has told us that the golden eras of agriculture often turn into fool’s gold,” says Jason Henderson, economist for the Federal Reserve Bank of Kansas City. To examine the instigators behind the ag boom and try to determine if this round is different, the Kansas City Fed recently held a symposium for a sell-out crowd of bankers and industry leaders.

The good news is, not a single speaker predicted a bust in the ag economy, although most have income and debt concerns moving forward. The same factors continue to drive the boom times: Chinese demand, exploding ethanol use and low interest rates. The bad news, and what makes this cycle different, is that every factor is driven by politics: Chinese import decisions, the ethanol mandate, interest rates and the strength of the dollar. Policy, like the weather, is hard to predict.

Black Swan No. 1: Chinese Imports. Europe could fall into a dark recession, which would throttle imports of Chinese goods and impact imports of U.S. ag products, noted Mike Boehlje, ag economist at Purdue University.

If Europe stumbles and investments flow into the safe haven of the U.S., a stronger dollar could result, increasing the cost of grain to global buyers. Chinese economic growth is projected to moderate to 5% to 6% by 2025, according to one estimate.

“In China, 5% growth is equivalent to a recession,” Boehlje said at the symposium. That’s not good news for the farm sector.

Others disagree. “A slump in China’s growth would mean that the Chinese Communist Party would be more willing than ever to pay whatever it takes to keep ag imports coming in to avoid public unrest,” said William Hudson, principal, the ProExporter Network.

Black Swan No. 2:  Low Interest Rates. Boehlje said, is that while present low interest rates go a long way to separate the current agricultural boom with past ones, they won’t last forever. Once the U.S. economy improves, the Fed will likely tighten its monetary policy to make sure inflation does not raise its ugly head.

“We have the potential for farm debt problems if there is a rapid reduction in incomes and if over the next two to three years, we see rising interest rates,” Boehlje said. “Put the two together and we might get something not dissimilar to the 1980s. I’m not worried about next year, I’m worried about 2013/14.”

Things are the same but different too. What’s different from the 1970s and early 1980s is that farmers are in much better financial condition, so they’re better able to withstand a correction, said Clayton Yeutter, former U.S. Trade Representative and Secretary of Agriculture. Today, the U.S. is an export kingpin, further separating this boom from earlier ones. As late as 1968, U.S. agriculture was exporting only $10 billion worth of products and commodities. This past year, the figure was $140 billion.

What worries Yeutter is the level of euphoria among crop producers. “When there is euphoria, things can get out of line with reality,” he said. Case in point, the 1970s. “A correction is in order,” Yeutter added.

While many farmers think lower debt this time around will spare the industry from a disaster, that’s not the necessarily case. According to Allen Featherstone, an economist at Kansas State University, in 1979 his state’s debt-to-asset ratio was 24.6%, but was higher in 2010 at 26.8%.

“We have higher leverage now than in 1979,” Featherstone said. “The financial situation is better than eight years ago, but not so much better that we have removed all of the risk.”

Despite all the talk about low interest rates, Featherstone said, the real cost of money now—factoring in inflation—is actually 4.67% compared with 2.4% in the 1970s. “Money isn’t quite as cheap when you adjust for inflation,” he added.

Black Swan No. 3: Profit Perspective. Hudson is bullish on crop prices and income. His long-term projections call for corn prices to moderate but remain at profitable levels to 2021, near $5 per bushel most years. He believes demand from ethanol and China will hang tough. Most costs will increase appreciably, however.

Hudson forecasts net return over total costs for crop producers to go from $33.3 billion in 2011/12 to $14.4 billion in 2014/15 and to $6.4 billion by 2020/21—still black ink every year, though.

What do farmers think about the future? Brent Gloy, an economist at Purdue, asked a group of Indiana farmers if they think agriculture is in a bubble. Of those who actively operate a farm, more than 50% said they believe that farmland prices are in a bubble.

His research also found no relationship between farmer expectations for corn prices and farmland values. Respon-dents estimated the average corn price for the next five years to be $5.41, although the distribution was all over the board. In other words, farmers are more optimistic about corn prices than most economists and USDA.

USDA NASS: Sept Crop Production – Corn Highlights

 Corn production is forecast at 10.7 billion bushels, down less than 1 percent from the August forecast and down 13 percent from 2011. This represents the  lowest production in the United States since 2006. Based on conditions as of September 1, yields are expected to average 122.8 bushels per acre, down 0.6 bushel from the August forecast and 24.4 bushels below the 2011 average. If realized, this will be the lowest average yield since 1995. Area harvested for grain is forecast at 87.4 million acres, unchanged from the August forecast but up 4 percent from 2011.

 USDA NASS: Sept Crop Production – Soybean Highlights

 Soybean production is forecast at 2.63 billion bushels, down 2 percent from August and down 14 percent from last year. Based on September 1 conditions, yields are expected to average 35.3 bushels per acre, down 0.8 bushel from last month and down 6.2 bushels from last year. Compared with last month, yield forecasts are lower or unchanged across the Great Plains and most of the Corn Belt as lingering drought conditions continued to hamper yield expectations. Area for harvest in the United States is forecast at 74.6 million acres, unchanged from August but up 1 percent from last year.

 USDA’s WASDE Sept Highlights – Wheat

 WHEAT:  The 2012/13 U.S. wheat balance sheet is unchanged this month; however, small by-class adjustments are made to projected exports and stocks.  Projected exports for Hard Red Winter wheat are lowered 25 million bushels with Hard Red Spring and White wheat exports raised 15 million bushels and 10 million bushels, respectively.  Corresponding changes are made to projected ending stocks for these three classes.  The projected range for the 2012/13 season-average farm price is lowered to $7.50 to $8.70 per bushel compared with $7.60 to $9.00 per bushel last month.  Prices reported for the summer months, when producers typically market nearly half the crop, have remained well below cash bids and futures prices, suggesting substantial forward pricing by producers earlier in the year.

 Global wheat supplies for 2012/13 are projected 3.1 million tons lower mostly due to lower expected production in Russia.  An increase in foreign beginning stocks partly offsets the projected 4.1-million-ton reduction in world wheat output.  Beginning stocks are raised for Canada and Egypt, but lowered for Argentina.  Production for Russia is reduced 4.0 million tons with lower reported area and reduced yields as harvest results confirm additional drought and heat damage to both the winter and spring wheat crops.  Production is also lowered 0.5 million tons for adjoining Kazakhstan, which experienced the same adverse drought and heat during July and August that affected spring wheat in the central and eastern growing regions of Russia.  EU-27 production is lowered 0.5 million tons mostly reflecting lower expected yields in the United Kingdom.  Ukraine production is raised 0.5 million tons based on higher reported yields.  Production for Afghanistan is raised 0.4 million tons mostly on higher reported area.

 Global wheat consumption for 2012/13 is lowered 2.6 million tons mostly on lower wheat feed and residual use in Russia and Kazakhstan.  Food use is also lowered slightly for both countries with additional reductions projected for food use in Egypt and Nigeria.  Food use is raised for Afghanistan, Iran, and Libya.  

 Global wheat trade for 2012/13 is lowered slightly this month with imports reduced for China, Egypt, EU-27, Israel, and Nigeria.  Import increases for Turkey and Iran limit the global decline in trade.  Exports are reduced 2.0 million tons for Ukraine based on the recent agreement between government officials and grain traders to limit shipments because of concerns about tightening domestic supplies.  Higher expected exports for Brazil, EU-27, and Turkey mostly make up for the Ukraine reduction.

 World ending stocks for 2012/13 are projected 0.5 million tons lower with changes to a number of countries.  The largest declines in stocks are for Russia, EU-27, China, Brazil, and Argentina.  The largest increases are for Ukraine, Canada, Iran, and Turkey.

 September 2012 USDA Crop Prod, World Supply/Demand Report

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       US Production     

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**USDA Sept 12/13 Corn Production: 10.727 bln bu; expected 10.3 bln bu; prior rpt = 10.779

**USDA Sept 12/13 Corn Yield: 122.8 bu/ac; expected 120.6 bpa; prior rpt = 123.4 bu/ac

**USDA Sept12/13 Soybean Production: 2.634 bln bu; expected 2.64 bln bu; prior rpt = 2.692

**USDA Sept 12/13 Soybean Yield: 35.3 bu/ac; expected 35.5 bpa; prior rpt = 36.1 bu/ac

**USDA Sept 12/13 Corn Used for US Ethanol: 4.50 bln bu vs Aug 4.50 bln bu

**USDA Sept Winter Wheat 2012 Production: 2.268 bln bu; est 2.22 bln bu; prior rpt = 2.268

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       US Carryout or Ending Stocks    

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**USDA Sept US Corn 11/12 Carryout:  1.181 bln bu; est 1.00 bln bu; prior rpt = 1.021 bln bu.

**USDA Sept US Soybean 11/12 Carryout: 0.130 bln bu; est 0.136 bln bu; prior rpt = 0.145 bb

**USDA Sept US Corn 12/13 Carryout:  0.733 bln bu; est 0.62 bln bu; prior rpt = 0.650

**USDA Sept US Wheat 12/13 Carryout:  0.698 bln bu; est 0.71 bln bu; prior rpt = 0.698

**USDA Sept US Soybean 12/13 Carryout:  0.115 bln bu; est 0.10 bln bu; prior rpt = 0.115

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       World Carryout   

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**WASDE September World 11/12 Wheat Carryout: 198.64 mmt; prior rpt = 197.59

**WASDE September World 11/12 Corn Carryout: 139.60 mmt; prior rpt = 135.97

**WASDE September World 11/12 Soybeans Carryout: 53.7 mmt; prior rpt = 51.9

**WASDE September World 12/13 Wheat Carryout: 176.7 mmt; prior rpt = 177.2

**WASDE September World 12/13 Corn Carryout: 124.0 mmt; prior rpt = 123.3

**WASDE September World 12/13 Soybeans Carryout: 53.1 mmt; prior rpt = 53.4

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       World Production

       Corn, Soybeans, Wheat

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**WASDE September China 12/13 Corn Output: 200.0 mmt; prior rpt = 200.0

**WASDE September S Africa 12/13 Corn Output: 13.5 mmt; prior rpt = 13.5

**WASDE September Argentina 12/13 Corn Output: 28.0 mmt; prior rpt = 28.0

**WASDE September Brazil 12/13 Corn Output: 70.00 mmt; prior rpt = 70.0

**WASDE September EU 12/13 Corn Output: 57.14 mmt; prior rpt = 61.5

**WASDE September FSU 12/13 Corn Output: 32.06 mmt; prior rpt = 32.1

**WASDE September Ukraine 12/13 Corn Output: 21.0 mmt; prior rpt = 21.0

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**WASDE September Aussie 12/13 Wheat Output: 26.0 mmt; prior rpt = 26.0

**WASDE September Argentina 12/13 Wheat Output: 11.50 mmt; prior rpt = 11.5

**WASDE September EU 12/13 Wheat Output: 132.37 mmt; prior rpt = 132.9

**WASDE September Canada 12/13 Wheat Output: 27.0 mmt; prior rpt = 27.0

**WASDE September China 12/13 Wheat Output: 118.0 mmt; prior rpt = 118.0

**WASDE September Russia 12/13 Wheat Output: 39.0 mmt; prior rpt = 43.0

**WASDE September Kazakhstan 12/13 Wheat Output: 10.50 mmt; prior rpt = 11.00

**WASDE September Ukraine 12/13 Wheat Output: 15.50 mmt; prior rpt = 15.0

**WASDE September India 12/13 Wheat Output: 93.9 mmt; prior rpt = 93.9

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**WASDE September Brazil 12/13 Soybean Output: 81.0 mmt; prior rpt = 81.0

**WASDE September Argentina 12/13 Soybean Output: 55.0 mmt; prior rpt = 55.0

**WASDE September China 12/13 Soybean Output: 12.60 mmt; prior rpt = 12.6