Urbana, Illinois
June 9, 2008
Uncertainty about crop production,
demand strength, and potential policy changes suggest that
significant price risk will persist into the heart of the corn
and soybean growing season, said a University of
Illinois Extension marketing specialist.
"The widespread concern about food price inflation leads to
questions about the potential for market intervention if crop
prices remain high or move higher," said Darrel Good. "Some
intervention occurred earlier as a number of countries adapted
policies to restrict exports or encourage imports in the face of
high prices.
"U.S. export restrictions are highly unlikely, but other policy
measures could be considered in extreme circumstances. There are
two obvious measures that could have significance."
The first, he noted, is additional Conservation Reserve Program
(CRP) initiatives to increase the availability of forage or to
expand crop acreage for harvest in 2009. The second is a
restriction on biofuels production.
"Reducing or eliminating biofuels mandates has been proposed,
but mandates are not currently the driving force in biofuels
production," Good said. "Production has been motivated by
gasoline prices and blender tax credits."
Good's comments came as he reviewed the rapidly changing crop
markets. Last week, discussion began about the end to the higher
price trend in corn and soybean prices. Ironically, that
discussion was followed by a move to new contract highs in both
markets.
"A number of factors unfolding over the past two weeks suggested
that the increase in corn and soybean prices that began last
fall might be coming to an end," he explained. "The USDA's
announcement of haying and grazing provisions for a large number
of CRP acres suggested to some that there would be a significant
decline in feed grain demand in the last half of 2008.
"Declining crude oil prices and the general world-wide assault
on biofuels production also signaled a potential decline in corn
and vegetable oil demand. Suggestions that the U.S. government
might take steps to defend the value of the U.S. dollar were
viewed as potentially negative for export demand for U.S.
crops."
Additionally, the sharp decline in wheat prices that made wheat
competitive as a feed grain also pointed to a weakening demand
for U.S. corn. The announcement by the Commodity Futures Trading
Commission relative to the withdrawal of proposals to increase
speculative position limits and to expand hedge exemptions was
thought to signal a bursting of the speculative bubble in crop
prices, even though credible evidence of a speculative bubble
was lacking.
"What changed?" Good asked. "Two developments last week
dramatically altered the fundamental situation for corn and
soybeans. One was the reversal in crude oil prices. After
declining by more than $10 per barrel, crude oil prices
rebounded to new highs on June 6. The reversal followed from
forecasts of continued upward pressure on prices into the summer
months. Sustained high crude oil and gasoline prices would
likely keep ethanol prices moving higher and support corn
demand.
"The second factor was the widespread heavy precipitation in
major corn- and soybean-producing areas. The ongoing wet weather
means further delays in the completion of planting. It now
appears likely that not all of the acres intended for corn and
soybean production will get planted or re-planted."
At a minimum, significant acreage will be planted well beyond
the optimum window for obtaining maximum yields. Whether from
smaller planted acreage, smaller harvested acreage, or reduced
yields, expectations about corn and soybean crop size are being
scaled back.
With trend yields, the USDA has already forecast a sharp
reduction in U.S. corn inventories by the end of the 2008-09
marketing year and the continuation of very tight soybean
inventories. If production falls short of expectations, further
reductions in corn consumption and rationing of soybean
consumption would be required, Good said.
The USDA will release updated projections of supply and use for
the current and upcoming marketing years on June 10. Those
updates may contain some revisions in the projected level of
consumption during the current marketing year.
"Soybean exports are progressing at a more rapid pace than
projected, while corn exports have slowed," Good said. "The most
interest, however, will be focused on any adjustments in the
average yield projections for 2008 and the implications for
inventories at the end of the 2008-09 marketing year."
Potential crop size may continue to dominate the movement in
corn and soybean prices over the next several weeks, he added.
"Ultimately, however, the strength of demand for these corps
will be most important as demand will determine the level of
price needed to ration production," he said. "Consumption rates
will be closely monitored for signs of a slowdown in use."
By Bob Sampson, University of
Illinois |
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