April 5, 2004
PRODUCTION UNCERTAINTY POINTS TO HIGH, BUT VOLATILE CROP PRICES
Corn, wheat, and soybean prices
have been propelled to high levels by a number of fundamental factors.
These include the small world wheat crop of 2003-04, the small 2004
U.S. soybean crop, large soybean imports by China, a poor end to
the 2004 South American growing season, and expanding domestic consumption
of corn. The net result is declining world inventories of grain.
For the next several months, prospects for the size of the U.S.
corn and soybean crops and world wheat production will be important
Last week's USDA Prospective
Plantings report provided the first ingredients for anticipating
U.S. crop production in 2004. The report indicated that producers
intend to reduce acreage of wheat and feed grains and increase acreage
of soybeans, rice, and cotton. Reductions are also intended for
canola and sunflowers. The major surprises in these intentions include
a large increase in soybean acreage, a very small increase in corn
acreage, and a decline in total planted acres of reported crops.
Intentions for all non-hay crops in this report were 832,000 acres
below last year's plantings.
At 79.004 million acres, corn planting intentions are only 268,000
acres more than planted in 2003, well below the average expectation
of an increase of 1.5 million acres. Most of the planned increase
is in the western corn belt, although a modest decline is intended
in Nebraska and a modest increase is expected in Ohio. This planned
increase in corn is more than offset by the 820,000 acre reduction
in sorghum planting intentions. In addition, reductions in combined
intentions for barley and oats (for harvest) totaled 773,000 acres.
Soybean planting intentions were reported at a record 75.411 million
acres, 2.007 million more than planted in 2003 and about 1 million
more than the average pre-report guess. Half of the planned increase
is in western growing areas, with the largest increase of 550,000
acres planned in North Dakota. Acreage in the eastern corn belt
states is expected to be near that of last year, with the remaining
half of the increase coming in southern and eastern areas of the
The Prospective Plantings
report also revealed producer intentions to reduce durum wheat seedings
by 158,000 acres and to reduce seedings of other spring wheat by
507,000 acres. Combined with the 1.573 million acre reduction in
winter wheat seedings, U.S. wheat area looks to be down by 2.238
It is generally believed that the planned increase in corn acreage
is not sufficient to accommodate the expected increases in consumption
of U.S. corn in the 2004-05 marketing year. That increase is expected
to be led by domestic use of corn for ethanol and by exports, as
China reduces the level of exports. As a result, corn prices have
moved sharply higher in a late effort to entice producers to plant
more corn and to slow the rate of corn consumption. The market will
have to wait for the USDA's June 30 Acreage report to see if producers
responded to this effort. In recent history, June acreage figures
were more than marginally above March intentions only in 2000. Since
the change in farm programs in 1996, the final acreage estimate
was also above March intentions only in 2000.
Corn yield prospects now become critically important for the corn
market. It is not often that a new record corn yield is required
just to keep pace with expected consumption. Prices could move sharply
higher if a growing season problem develops. Even with a trend yield
in 2004, the average 2004-05 marketing year price may well exceed
that of 2003-04.
With a significant rebound in the U.S. average yield in 2004, the
planned increase in soybean acreage is more than sufficient for
a rebuilding of U.S. supplies. However, the market is not in a hurry
to assume a high yield in 2004, given the experience of 2003. As
a result, a bizarre sort of bidding war with corn appears to be
taking place to insure that producers maintain plans to increase
In addition to U.S. production prospects, the soybean market has
several other factors to consider over the next few months, including
the size of the South American crop and the pace of domestic soybean
meal consumption. The potential for domestic soybean supplies to
be effectively depleted before the new harvest still looms. Will
the combination of reduced exports, South American imports, inventory
depletion, and early harvest be sufficient to make supplies last,
or will higher prices be required?
For wheat, the potential size of wheat crops outside the U.S. will
be as important as prospects for the U.S. crop. In particular it
will be important whether or not production rebounds from the very
low levels of the past year in Europe, Russia, and the Ukraine,
as it has in Australia.
Issued by Darrel Good
University of Illinois