January 24, 2000
Several factors continue to provide
support for corn, soybean, and wheat prices. Among these are continued
dry weather in some South American growing areas, dry weather
in some U.S. winter wheat areas, a solid rate of export sales,
and a large number of cattle in U.S. feed lots. These factors
may provide additional support for prices, but the most important
factor will be U.S. weather conditions.
Dry weather has reduced corn and
soybean production in some South American areas, but favorable
conditions in other areas will keep crop size reasonable. A significant
crop loss is not expected at this time. Large numbers of cattle
in U.S. feedlots, along with expanding poultry production, are
providing strong domestic feed demand. The January 28, Cattle
report, however, is expected to show smaller feeder cattle supplies
and prospects for fewer cattle being fed as the year progresses.
U.S. winter wheat production is in question, but world wheat supplies
are large and U.S. spring wheat acreage could be expanded to meet
a shortfall in winter wheat prospects. In short, old crop inventories
are sufficient. Carryover stocks will not be as large as projected
a month ago, but inventories are expected to be well above minimum
With normal weather and trend yield
sin 2000, upside potential in prices might be limited. Reasonable
targets might be $5.75 for November 2000 soybean futures; $2.65
for December 2000 corn futures; and $3.00 for July wheat futures
(Chicago). However, trend yields for the 2000 crop are not assured.
The recent dry pattern in many areas raises legitimate concerns
about prospects for average yields in 2000.
It is useful to put potential crop
size in perspective. For corn, to maintain carryover stocks for
the 2000-01 marketing year near the projected 1.7 billion bushels
for this year would require a crop of about 9.55 billion bushels.
If harvested acreage declines by about 500,000 acres, as many
currently expect, to 70 million, the average U.S. yield would
need to be 136.4 bushels per acre to produce a crop of 9.55 billion
bushels. Assuming use could be maintained at 9.55 billion bushels
with higher prices, the yield would need to be only 126.4 bushels
per acre to hold stocks above one billion bushels. The average
yield in 2000, then, would need to be about 5 percent below trend
to result in significant tightening of stocks.
For soybeans, to maintain next year's
carryover stocks near the 365 million bushels projected for this
year would require a crop of about 2.65 billion bushels. If harvested
acreage increases by 500,000 acres, to 73 million, the U.S. average
yield would need to be 36.3 bushels per acre to produce a crop
of 2.65 billion bushels. To maintain stocks above 200 million
bushels, the average yield would need to be only 34 bushels per
acre. The average yield in 2000 would have to be about 12 percent
below trend to result in a meaningful reduction in year ending
stocks next year.
For wheat, to maintain next year's
carryover stocks near the 970 million bushel level projected for
this year would require a crop of about 2.4 billion bushels. If
harvested acreage remains near the 54 million of 1999, the U.S.
average yield would need to be 44.4 bushels to produce a crop
of 2.4 billion bushels. To maintain stocks above 700 million bushels,
the average yield would need to be only 39.4 bushels per acre.
Current stocks provide some buffer
for a shortfall in U.S. or world production in 2000, but a significant
crop problem would likely require higher prices to reduce consumption
to the level of available supplies. How high prices would need
to go would be a function of the magnitude of crop loss and the
strength of demand.
For old crop corn still eligible
for loan benefits, continued ownership is likely a prudent strategy
for now. For soybeans still eligible for loan benefits, the 60-day
lock-in provision for loan repayment is still an attractive alternative.
Old crop corn and soybeans not eligible for loan benefits are
more problematic. A strategy of spreading sales into the spring
may be one alternative. For new crop soybeans, prices are generally
below the loan rate. New crop corn prices are well above the loan
rate. Scale up selling of some percentage of the new crop might
be considered. Premiums are about $.25 for December at-the-money
options, resulting in a minimum price only about $.10 to $.15
above the loan rate in many areas.
University of Illinois