August 20, 2001
IS THE CORN AND SOYBEAN PRICE
Hot, dry weather conditions and
concerns about crop size drove December 2001 corn futures to a
summer high of $2.47 on July 13. November 2001 soybean futures
reached a summer peak of $5.38 on July 17. At the close of trade
on August 17, December futures were at $2.2825, and November futures
were at $5.0275. Those prices are $.06 and $.0925, respectively
below the settlement prices of August 10, the day the USDA's Crop
Production report was released. Prices were sharply lower in early
trading on August 20. The market has had a lot of supply and demand
information to absorb over the past 10 days.
On the supply side, the USDA's weekly
report of crop conditions has shown deteriorating crop conditions
since the August yield estimate was released. As of August 12,
only 60 percent of the corn crop and 57 percent of the soybean
crop was rated in good or excellent condition. That compares to
75 and 65 percent, respectively, a year ago. Ratings were near
the lowest for the season. The generally warm and dry conditions
of late July and early August convinced most analysts that 2001
U.S. average corn and soybean yields would be below the August
forecast. However, cooler temperatures and a little more abundant
rainfall in mid-August created more divided opinions about yield
potential, particularly for soybeans.
On the demand side, an acceleration
of corn export sales this summer, particularly to Japan, improved
export prospects for the marketing year ending this month. The
USDA raised its forecast to 1.875 billion bushels, 50 million
larger than the July forecast. The USDA has also forecast a significant
increase in corn and soybean oil exports during the 2001-02 marketing
year and expects soybean and soybean meal exports to remain large.
In addition, the recent restriction on the use of the oxygenated
fuel, MTBE, has generated expectations of expanding use of corn
for ethanol production. For the year ahead, the USDA has forecast
a 60 million bushel (9.7 percent) increase in use of corn for
Much of the optimism about corn
exports during the year ahead centers around prospects for a second
consecutive small corn crop in China and reduced competition from
Chinese exports. The USDA has forecast a decline of 235 million
bushels in Chinese exports during the 2001-02 marketing year.
However, China has recently announced additional corn export tenders.
The results of those tenders are not clear, but they may have
represented more than 100 million bushels of additional sales
For soybeans, on-going reports of
plans to expand soybean acreage in Brazil by 9 to 10 percent this
year raises concerns about continuing competition in the export
market. The USDA now projects 2002 South American production potential
at 2.513 billion bushels, 55 million larger than the 2001 record
harvest. In addition, GMO issues continue to haunt the soybean
market. China recently announced a policy that would restrict
imports of GMO, although the details are not available and it
is not clear how such a policy would be enforced. Finally, scientific
reports last week of the presence of additional DNA associated
with a popular GMO soybean, while not new information, sent a
bit of a shock through the market.
For the next two months, corn and
soybean prices will continue to be influenced by expectations
about U.S. crop size. Recent events, however, suggest other factors
may be important as well. The continuation of seasonal temperatures
and some rainfall in the midwest suggest that prices will remain
below the mid-July highs. The USDA will release new production
forecasts on September 12.
Harvest time marketing strategies
will be influenced by the level of cash prices in relation to
loan prices, the magnitude of the carry in the price structure,
and the cost and availability of storage. If prices are near the
loan level (more likely for corn than soybeans) producers will
likely be interested in storing the crop under loan. Such a strategy
involves little price risk, but generates storage costs. If prices
are significantly above the loan rate, producers will likely make
large sales at harvest, given that pre-harvest sales have been
small. This scenario has a low probability, particularly for soybeans.
Finally, if prices are well below the loan rate, producers will
likely establish loan deficiency payments and retain ownership
of much of the crop. The lack of carry in the soybean price structure
offers little incentive to store soybeans, so that "ownership"
by other methods (futures, basis contracts, etc.) might be considered.
The carry in the corn market may be large enough to make sales
for deferred delivery attractive.
Issued by Darrel
University of Illinois