Urbana, Illinois
October 6, 2008
There is substantial concern about
the implications of the current meltdown in U.S. credit markets
on the potential for economic growth in the United States and
the rest of the world, said a University of
Illinois Extension marketing specialist.
"That concern is reinforced by the sharp decline in stock
prices and underlying economic indicators such as unemployment
rates and housing starts," said Darrel Good. "Prospects of an
economic slowdown threaten the robust domestic and export demand
for U.S. agricultural commodities enjoyed over the past two
years.
"A widespread economic slowdown could result in weaker demand
for meat and for livestock feed. In addition, an economic
slowdown might contribute to a weaker demand for crude oil and
further declines in the prices of unleaded gasoline. Lower
gasoline prices imply lower ethanol prices which imply lower
breakeven corn prices for ethanol producers."
Good's comments came as he reviewed corn and soybean prices,
which have dropped sharply over the past two weeks, continuing
the slide from the early summer peaks. The decline in December
2008 corn futures now exceeds $3.60 and the drop in November
2008 soybean futures is nearly $7.
"Some of the recent decline reflects the larger supplies
revealed in the USDA's September Grain Stocks report," he said.
"That report revealed Sept. 1 inventories of soybeans of 205
million bushels. That is about 55 million more than expected
after the release of the Census Bureau estimate showing August
2008 crush about 15 million bushels lower than expected."
The year-ending inventory resulted in a 91 million bushels
increase in the estimated size of the 2007 crop. The increase
reflected more acres and higher yields than earlier estimated.
It has been clear since January 2008 that the size of the crop
had been underestimated as "residual" use of soybeans revealed
in the quarterly stock estimates has been extremely small, he
noted.
"It was generally believed that the crop estimate would be
increased enough to bring residual use up to a normal level," he
said. "The large year-ending stocks were a definite surprise."
Sept. 1 inventories of corn were estimated at 1.624 billion
bushels, 48 million bushels larger than projected in USDA's
September supply and demand report. Summer corn feeding may have
been less than expected due to feeding of low-priced wheat.
In addition to larger year-ending stocks, larger corn and
soybean production estimates by some private forecasters and an
accelerating pace of harvest have added supply-side pressures to
prices. The USDA will release new production forecasts on Oct.
10.
"While supply issues are at play, much of the recent decline in
prices reflects concerns about the current and future demand for
corn and soybeans," said Good. "The current pace of exports and
export sales of corn, for example, is especially slow.
"The USDA projects a 17.5 percent year-over-year decline in
exports, but current export commitments are 37 percent less than
those of a year ago. The pace of soybean export commitments
exceeds that of a year ago by 4 percent, even though USDA
projects a 13.4 percent decline for the year. The pace of new
sales, however, has declined relative to that of a year ago
every week since the middle of August. The smaller-than-expected
domestic soybean crush in August also suggests that demand for
soybean meal is softening."
Even with the legitimate concerns about demand, prices may well
get overdone on the low side as traders adjust to the new
developments. Just as prices went to a level that could not be
sustained with fears of crop loss this spring and summer, prices
may now go too low, Good noted.
"The problem, of course, is that the extent and magnitude of any
economic slowdown and demand weakness for agricultural
commodities is not known," he said. "The overreaction of prices
to the high side this spring was confirmed when weather patterns
changed and the extent of crop losses became clearer. That
happened in a relatively short period of time.
"The U.S. and world economic situation may take much longer to
sort out."
Current corn and soybean prices project to very tight margins
for producers for the 2009 crop, particularly for those with
high land costs.
"Prices are not likely high enough to generate any increase in
acreage in 2009, but if demand weakens sufficiently, an increase
may not be needed," said Good. "For the 2008 crop, the lower
prices now being experienced may be partially offset by
insurance payments, particularly for soybeans, for those who
have revenue insurance products.
"For those who decide to hold inventory in anticipation of an
eventual price recovery, the Commodity Credit Corporation (CCC)
loan program can be a source of some cash flow."
By Bob Sampson, University of
Illinois |
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