Crop Prices Are Definitely in a Demand-Driven Market

Crop Prices Are Definitely in a Demand-Driven Market

"The 2010 crop is the third largest corn harvest in U.S. history. It's the largest soybean crop the U.S. has ever had. However, demand has built up so much on these crops that it's putting real pressure on prices to move upward," says ISU's Chad Hart.

At the annual series of outlook meetings being held across the state this week and last, Iowa State University Extension economists Shane Ellis and Chad Hart are the keynote presenters. Ellis is the ISU Extension livestock economist and Hart is the grain marketing economist.

Looking at the numbers for 2010 crop size for corn and beans in the November 9 USDA Crop Report, Hart points out the 2010 U.S. corn crop is estimated to be the third-largest on record. With a projected surplus of 827 million bushels, is down from earlier USDA estimates and prices have moved higher as the market will ration supply to meet the demands for U.S. corn for food, feed and fuel.

In this report, USDA reduced U.S. production and yield estimates slightly to 12.5 billion bushels and 154.3 bushels per acre. These revisions follow previous adjustments made in the report released on October 8 that showed reductions of the estimated 2010 national average corn yield from 162.5 to 155.8 bushels per acre and overall corn production from 13.2 billion to 12.7 billion bushels.

Average farm price for 2010 corn projected at $5.20 by USDA

Projected yields in Missouri, South Dakota and Nebraska were reduced the most substantially from October projections seeing 7-, 5- and 4-bushel-per-acre declines respectively. Notably, Minnesota and Wisconsin are still on track to break previous state yield records.

The average farm price as projected by USDA as of November 9 increased 20 cents per bushel over the October estimate, to $5.20 per bushel. A USDA announcement released on Sept. 30 reporting the U.S. carried an additional 322 million bushels of corn carried into this year tempers what could have been more severe increases in corn prices. Some people look for another reduction in the U.S. crop size estimate for 2010 when the final USDA estimate comes out in January. That remains to be seen. Meanwhile, how will the U.S. make up the difference for next year? Will we see more acres coming back into production?

We'll see more acres planted in 2011—where will they come from?

"We will see more acres planted in 2011," says Hart, "such as we saw in 2006-2007, when the U.S. brought about 5 million acres back into crop production because of higher prices. We're setting up that same scenario today." Ethanol production will be affected; how much will depend on high corn prices go as they move higher to ration demand. Livestock production will also be affected.  Analysts are characterizing the 2010 crop as a "short crop with a long tail." Is that the case today? "You have to look at this situation today as mainly a demand-driven market," answers Hart. "When you look at what we have this year, this is still the third largest corn crop in U.S. history. It's still the largest soybean crop we've ever had. However, demand has built up so much on these 2010 crops that it's putting real pressure on these prices to move upward." Looking at the whole landscape, what does he think will be the impact cotton is going to have on corn and soybean acres, as cotton is an important crop in the southern U.S.? Cotton prices today are the highest they've been since the Civil War. "A shift is going to occur in the crop mix as more land is brought back into production," he says. "If it works like 2007 did, what happened was farmers added about 5 million acres to the number of planted acres in the U.S. Those were acres that had been falling out of crop production over the previous years. We've had the same thing happen as we went through 2008, 2009 and into 2010," he adds. "We've lost some of the planted acres compared to what had been in production in 2007. I think that acreage will come back into production in 2011 and it will get split among cotton, corn, soybeans and wheat. A lot of the crops now have competitive pricing going into the 2011 planting season."

Look for more double-cropping of beans after wheat in the U.S.

With the situation the U.S. has with soybeans now with this lower crop production estimate for 2010 in the November 9 USDA Crop Report, prices are hovering around $13 a bushel now on new crop soybeans as well, could some of those acres possibly come out of wheat and go to soybeans in 2011?  "Perhaps some may," says Hart. "But I think there will be more double-cropping of soybeans. Beans next year will be planted following wheat harvest in late June or in early July in states and areas that are south of Iowa. I'm talking about the central and southern parts of Missouri, Illinois and Indiana and areas south. What we saw, especially in 2009 and 2010, was the loss of that double-crop wheat followed by soybeans in that region of the country. I think double-cropping will come back strong there in 2011." What is the status of the bean crop currently in South America—Brazil and Argentina? Those farmers are still holding some soybeans, says Hart. "The latest USDA numbers indicate the South American crop is a little bigger than we thought down there. So crop production numbers from that area of the world are rising. But I'm watching South America because of the La Nina weather pattern that has developed. At least right now it looks like South America is going to have a little bit better bean crop than we had been expecting for their harvest next February and March in those countries."

How will La Nina weather affect crops in Brazil, Argentina?

How does La Nina affect the crop in South America? "What I'm watching for is: are we going to get a little drier period during the next month to a month and a half on their newly-planted soybean crop down there? There is not a strong relationship between dryness in South America and a La Nina event, but it is something that has occurred from time to time in the past down there." Many Iowa farmers are skeptical of the recent USDA crop report estimates. As the numbers for the 2010 U.S. corn and soybean crop came in each month this fall, the numbers have continued to shrink. Has there been a shift at USDA, as to how they gather the information for their crop report? Has something changed? "No, I wouldn't say that," says Hart. "But when you look at some of the data USDA has released with its numbers, it does tell the story of why we've seen that yield continue to shift. They release data on the amount of ears per acre they see in the field and the weight they are seeing per ear each month—the grain weight. What USDA has seen consistently from August to September to October and now in November is fewer ears per acre and lighter weights per ear. And that shows up in the yield estimates USDA makes and releases each month."

What's going on with the USDA crop size estimates this year?

USDA enumerators when out to the fields in August, were seeing record plant populations, he notes. They've been backing off with their estimates ever since then, especially with the estimates of grain weights. The grain fill period this year in much of the Corn Belt was about a week shorter than normal. And when you have that, you just can't get as much weight in each kernel. With the acreage shifts the U.S. has had since the fall of 2006, is that also playing a role in how the government models these crop numbers? USDA has taken the same approach as far as their objective yield survey as they did before the acreage shift, says Hart. They have done a little more sampling for corn and beans due to the acreage increase but that doesn't change their basic approach to how they model the yield and make the estimates. Looking toward 2011, farmers are seeing some pretty substantial prices, higher price prospects, especially on soybeans at $13 or over and $6 on corn; higher prices than they've seen for awhile. What does Hart recommend farmers do?

Should you be pricing some of your 2011 expected production now?

"Farmers are sitting in the drivers' seat regarding their 2010 crop," Hart answers. "They're looking at prices that are well above their production cost for 2010. So they're in the drivers' seat for awhile. They can sell for good prices now and it looks like the market will be offering these good prices for some time."  He adds, "As I'm looking out into 2011, I think this offers some prime opportunities for some preharvest pricing of that 2011 crop, even preplanting pricing of the crop. But there is also some upside price potential too, especially if we get into the year 2011 and have any production problems."  The world grain supply has tightened up. Are we seeing an increase in wheat acres? With current wheat prices, and wheat is always growing somewhere in the world, it seems the price today is good incentive to grow more wheat. "It should be a good incentive," says Hart.

Big U.S. acreage battle between crops is shaping up for 2011

He adds, however, "We're waiting to see how the numbers come through. This year was a really bad year for wheat production. Russia, Ukraine, Kazakhstan are big wheat producing countries that had trouble with drought and ended up with small crops. We're still watching what's going on in Russia and those areas. Those numbers are starting to look better as we look forward to the 2011 crop coming up for them. So we're not sure exactly how that is going to pan out yet." It's going to be an interesting acreage battle as farmers get ready for planting corn and soybeans in 2011 in the United States. Farmers are going to be pulling more acres back into production, but will they be corn or soybeans? Farmers are looking at an opportunity in the Midwest to see acreage expansion, more inputs are already being purchased. Fertilizer prices are moving up this fall. What does Hart see happening on the crop input side of the equation? "Definitely, fertilizer prices have already started rising—as demand for fertilizer—N, P and K, is quite strong this fall," says Hart. "We're going to see an increase in other crop input costs as well. It happened in 2007-2008. Grain prices went up and the cost of inputs tends to move up after them, in response."

A lot of nitrogen fertilizer is being applied this fall in Iowa

There is a lot of anhydrous ammonia being applied in Iowa this fall, and across the Corn Belt, he says. So the Midwest is getting set up to plant a lot of corn next spring. Anhydrous applicators are applying nitrogen in more fields than usual this fall as the weather has been very cooperative and farmers also fear that nitrogen prices could be even higher next spring—so they're applying it this fall. Those acres with the nitrogen already applied are locked in for corn to be planted there next spring, notes Hart. But farmers don't mind being locked in, with new crop corn running at $5.50 per bushel on the December 2011 futures contract. Some analysts think corn may take a run at $6 per bushel. Soybeans are already approaching $13 per bushel. The question is, with all this fertilizer already applied and thus more corn acres locked in for 2011, where will the soybean acres come from? It looks like more total acres are coming back into production in a big acreage year in 2011. As Hart says, some increase in soybean production will come from increased double cropping in the southern areas of the Corn Belt and in states to the south.

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