Why Aren't Supply & Demand Fundamentals Moving Corn & Soybean Markets?

URBANA, Ill.-(UI Extension)--You have carefully constructed your marketing plan for the new crop. Your cost of production is noted. Tabs are kept on the domestic crop production. Notes are made about demand, and pricing opportunities look good with strong demand for both corn and soybeans. Fundamentals are strong, but for some reason the market does not seem to be following the fundamentals. In fact, it is totally ignoring the fundamentals. So what do you do with your marketing plan, tear it up?

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U.S. Regulators Review Huge NYMEX Oil Price Surge

WASHINGTON-(Reuters)--The U.S. regulator of futures markets said it was reviewing the historic jump in crude oil prices on Monday to assure the trading was valid.

The U.S. crude oil expiring contract for October soared by $16.37 to settle at $120.92 a barrel. At one point, the contract was up by $25.45 a barrel, or 24 percent.

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U.S. 2008/09 Rough-Rice Crop Projection Raised

WASHINGTON-(USDA)--There were several supply-side revisions this month to the U.S. 2008/09 rough-rice balance sheet.

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Global Cotton Consumption To Decline in 2008/09

WASHINGTON-(USDA)--The latest U.S. Department of Agriculture (USDA) projections for 2008/09 indicate that world cotton mill use is expected to decline for the first time in five years.

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MU Extension: Crop Price Volatility Requires Risk Management

CORNING, Mo.-(MU Extension)--Ethanol for fuel has helped bring high profits to crop producers, but near-record prices for corn have a downside: increased volatility and risk to farms, said a University of Missouri Extension agricultural economist.

"The use of corn for ethanol crept along a couple years ago, and then it blossomed, along with corn prices," said economist Ray Massey of the MU Extension Commercial Agriculture Program. "What we're seeing is a new driver in the corn market. When corn is used for fuel production, its price will fluctuate with the price of fuel, which is very volatile."

Massey discussed market volatility and how high profits lead to high-risk marketing at the recent field day at MU Graves-Chapple Farm, near Corning, Mo.

"In economics, markets abhor a profit," Massey said. "They won't allow profits to stay. They will go to zero through price increases in all the factors of production, such as seed, fertilizer, labor, management or fixed assets."

Profits will go toward zero first for ethanol producers, then for crop producers, and eventually for input suppliers and landowners, he said. Fertilizer and chemical costs historically have fluctuated and may come down as corn production profits erode, but seed and land prices haven't come down as easily in the past. "It's going to be a painful transition."

In July and August, the price of corn fluctuated by $1.50 per bushel, Massey said. "This is abnormal, but it occurred because of the new player in the market of what we demand of corn."

High prices have helped growers, but margins are tight because of soaring input costs, Massey said. "I don't know of any crop farmers who haven't made a profit, but we still have a lot of farmers calling with concerns."

Increased volatility is due in part to investors injecting cash into crop commodities, Massey said. "The bubble-burst cycle went from technology to real estate to commodities - and not just corn and soybeans, but fuel."

A lot of money going into something too fast inflates prices. "At some point, the market realizes the price went too high too fast, and it bursts."

With high volatility in markets, vigilant risk management is crucial. In assessing the financial strength of farms, banks look at what's called the current ratio, which compares assets and liabilities to determine if a business has the resources to pay its debts over the next 12 months.

"Make sure your current ratio is at least 1.5 or 2.0 or higher," he said. A current ratio of 2.0 means that for every $1 of current debt, a grower has $2 in current assets.

Grain in the bin would be a current asset, he explained. "You may put grain in the bin and think it's worth $5 per bushel, but then it drops to $4." Keeping the current ratio high will help guard against price volatility, he said.

Growers also should think in terms of cash reserves. "It's costing twice as much for seed and fertilizer, but do you have twice as much cash reserves?"

Risk-management strategies employed by farmers include securing a forward price from the local grain elevator. In forward pricing, buyer and seller agree on the price of a commodity before it has been produced. This protects farmers from a sharp drop in crop prices, though it also commits them to the forward price even if prices in fact go up.

Farmers can similarly guard against sudden increases in some production costs. "There are opportunities for forward-purchasing inputs right now," Massey said. "You take a risk, but what you get rid of is the fluctuation."

Communicating with bankers, input suppliers and grain buyers is also important. "If a farmer is unable to get the local elevator to forward-price his grain, he may take out a futures position," he said. But the futures position means the farmer is subject to margin calls that affect his cash requirements.

Massey added, "If a farmer takes on a margin call himself and doesn't communicate with his banker, the banker may hesitate when asked for cash to cover the margin call that is protecting your grain price."

T. Boone Pickens: Oil Won't Go Much Below $100/Bbl

NEW YORK-(Dow Jones)-- Billionaire oilman T. Boone Pickens says he doesn't think oil will go far below $100 a barrel. "You've got to have some demand response to the lower price, and as demand comes back up, the price will follow," he told CNBC Tuesday.

"If OPEC wants to support the price, they may announce it, or they may just ease back on their production," he said, adding that OPEC will "balance the market."

Pickens also reiterated his demand for the U.S. government to formulate a new energy policy, calling for more natural gas usage, wind power and oil drilling off Florida's coast and in the Arctic National Wildlife Refuge.

Expert Cites Crop Size and Energy Costs As Two Main Factors Influencing Corn and Soybean Prices

URBANA, Ill.-(Grainnet)--Two broad fundamental factors appear to be influencing corn and soybean prices as the growing season reaches the last stages, said a University of Illinois Extension marketing specialist.

"One of those factors is the potential size of the 2008 U.S. harvest and the other is the level of energy prices," said Darrel Good.

"Crop size is important for obvious reasons and energy prices are important in determining the value of crops for biofuels production.

"That link is especially important for ethanol and corn prices."

On Sept. 12, the USDA will release a new production forecast for corn and soybean.

There appears to be a fairly wide range of expectations for the size of the new forecasts, which will primarily reflect a reassessment of yield potential.

"The dry end to the growing season in some important production areas has some leaning toward smaller yield forecasts," he noted.

"Improving weather in southern growing areas and relatively high crop condition ratings suggest to others that yield forecasts might hold steady or increase."

As of Aug. 24, just ahead of the survey period for the September yield forecasts, the USDA reported that 64 percent of the corn crop and 61 percent of the soybean crop were rated in good or excellent condition.

"If those ratings held through the end of the growing season, past relationships between crop condition ratings and the trend-adjusted U.S. average yield would point to 2008 average yields of 154.4 bushels for corn and 43.5 bushels for soybeans," he said.

"Such a corn yield would be 0.6 bushels below the August forecast, but the soybean yield would be three bushels above the August forecast.

"Over the past 35 years, the largest increase in the U.S. average soybean yield forecast in September was 2.2 bushels in 2006.

"That year, the actual U.S. yield was 3.1 bushels above the August forecast."

Another way to form expectations about the September yield forecasts using the crop condition ratings is the change in condition ratings since the survey period for the August forecast.

The percentage of the crops rated good or excellent since that time has dropped two percentage points for both crops.

"Such a decline points to a 1.3 bushel decline in the corn yield forecast, to 153.7 bushels, and a 0.4 bushel decline in the soybean yield forecast, to 40.1 bushels," he said.

"Those calculated changes could be adjusted by the crop condition ratings released on Sept. 2."

Beyond the September yield forecasts, the location and amount of rainfall in early September will likely be more important for soybean yields than for corn yields, he added.

"If the estimates of harvested acreage and the forecasts of consumption during the 2008-09 marketing year remain unchanged, the lower yield forecast based on the change in crop condition ratings during August would point to year-ending stocks of 1.03 billion bushels for corn and 106 million bushels for soybeans," Good said.

Prices for crude oil and the resulting price of unleaded gasoline have implications for the price of ethanol and the price ethanol producers can pay for corn.

"As a guide, the maximum economic value of ethanol is the price of unleaded gasoline, adjusted for the difference in energy content, plus the blender's tax credit," he said.

"That credit is currently at 51 cents per gallon, but is scheduled to decline to 45 cents in 2009.

"The current price of wholesale unleaded gasoline of about $2.70 per gallon makes ethanol worth about $2.26 per gallon with a 45 cents blender's tax credit.

"Assuming that the price of corn and distillers grain move together and that the non-corn cost of making ethanol is about $2.60 per bushel, the breakeven price of corn for ethanol producers is about $5 per bushel."

Good noted that factors beyond crop size and energy prices could be important for corn and soybean prices.

"The ultimate size of the world wheat crop, prospects for South American soybean production, world economic conditions, and perhaps the value of the U.S. dollar will influence export demand," he said.

"The profitability of the U.S. livestock industry will influence domestic feed demand.

"The year-over-year decline in domestic soybean meal consumption since April and the sizeable year-over-year decline in the domestic soybean crush in July indicate some weakening of feed demand, although part of the decline is likely the result of larger supplies of distillers grains."

Current prospects for supply, consumption, and stocks suggest that corn and soybean prices will remain relatively high, but will likely trade in a wide range for an extended period.

"That volatility will likely increase even further with the start of the 2009 planting season," Good said.