Corn & Soybean Outlook:

Dark Skies Are About To Clear

By Gavin Maguire, Director, EHedger

Overview:

Corn and soybeans look set to test multi-year lows during early harvest in 2009, but there are reasons to expect momentum to turn higher as the year-end approaches. The prospect of near record crops emerging amid a patchy demand environment looks set to shroud the corn and soy markets in gloom and doom for the early Fall of 2009, but for producers who are able to peer through the dark there should be signs of light at the end of the tunnel as 2010 rolls around.

Producers of both corn and soybeans have been presented with terrific sale price opportunities over the past 12 months – more than $7 a bushel in December 2009 corn futures and over $15.50 in November 2009 futures – and yet a majority of U.S. growers enter the 2009 harvest season largely undersold, un-priced and unhappy. So what can those growers expect in return for their corn and soybeans over the coming 6-12 months?

Well, as of late July 2009, the near term outlook is quite grim. As you can see in the chart below, we appear set to have a combined record amount of corn and soybean planted acres, a record soybean planted acres figure, and the second or third highest corn planted acres number ever. At the same time, end user appetite for both those crops remains a little delicate at best. Animal numbers are on the decline globally as the World tightens its collective belt, and U.S. livestock inventories are at their lowest level since the 1960s. (See chart 2). This equates to fewer mouths to chew through our collective inventories of animal feed, which look set to swell as 2009 winds down and a potentially huge U.S. harvest wrap up. (See charts 3 & 4 for ending stocks of both U.S. corn and soybeans.)

Fresh Lows On The Horizon:

Given the combination of soft near-term demand and ample fresh production, the near term bias of these markets remains lower. Indeed, we could see cash corn prices descend below $2.50 a bushel and soybeans drop into the low $7’s. This would wind the clock back to the pre-2007 era when $8 soybeans and $3.50 corn were viewed as decent prices, but completely wipe out the period of historic price strength that prevailed in the interim.

This possibility of such low price levels has amazed many market watchers who just in June were faced with corn values of more than $4.70 and soybean prices of more than $10.80. But for those market advisors who truly scrutinized the demand landscape prevailing this year, the prospect of such weak prices is no surprise, and is indeed justified. But what about further down the road?

A New Dawn In 2010

While things are likely to be grim in the fall of 2009, we are anticipating corn and soybean price momentum to pick up steam to the upside as 2010 approaches. From a macro economic perspective, there are ‘green shoots’ starting to show in several regions, which give us hope that the global economy is through the worst of the recent recession and on the slow road to recovery. If this occurs, then increases in consumption of all commodities can be expected that will help us draw down inventories of our major grains. This extends beyond basic raw materials such as timber and metal and into agricultural markets for protein and grains as consumers everywhere improve their diets a notch. It must be remembered that in the midst of a fearsome recession, people naturally scale back on all sorts of consumption, but when economic optimism grows, so too does peoples’ appetites….

An improved economic environment would also restore profitability and confidence to the consumption side of our industry. Livestock producers, processors and biofuel refiners would all enjoy a boost in profit margins in such an environment, as well as more flexible credit availability that would allow them to scale up production from the current stunted levels. Such activity would lead to a quickening in consumption of all manner of agricultural products, and generally set the stage for a period of firming grain and oilseed prices.

Whether or not we revisit the price highs of early 2009 any time soon remains unknown at this juncture, but we are confident that we’ll put in our lows in September/October, and that the path of least resistance for corn and beans will be to the upside over the final months of 2009 and into 2010.