Recent history has been one of growing demand for U.S. commodities at times of tight U.S. and world stocks of feed grains and wheat, sporadic production problems. Results: record high prices. With high expectations for ample harvest of large feed grain, wheat, and soybean crops expected for 2008-09 and some cracks forming in the demand picture, prices may take on a weaker tone. Still, expect prices to remain relatively volatile as both production and demand uncertainty persist.
In August, USDA released its Crop Production report. On the production side, there seems to be a fair amount of skepticism about USDA’s forecast of production potential. Some argue that both acreage and yield forecasts are too optimistic. The report followed earlier predictions of reduced yields due primarily to extensive flooding of the Corn Belt region.
The August U.S. average yield forecast for corn is very consistent with crop condition ratings in early August and with forecasts based on crop weather models. The August U.S. average yield forecast for soybeans was well below that indicated by crop condition ratings and crop weather models, perhaps reflecting the lateness of the crop. Regional yield forecasts within states appear to be very consistent with weather patterns to date.
In the USDA report, corn production is forecast at 12.3 billion bushels, down 6 percent from last year’s record, but up 17 percent from 2006. Based on conditions as of August 1, corn yields are expected to average 155 bushels per acre, up 3.9 bushels from last year. Yield forecasts may remain high after that if some late season rain is received in the dry areas and if the crop reaches maturity without a widespread killing frost. Soybean yield prospects are more difficult to anticipate. Soybean production is forecast at 2.97 billion bushels, up 15 percent from last year but down 7 percent from the 2006 record. Yields are expected to average 40.5 bushels per acre, down 0.7 bushels from 2007, while harvested area is expected to be 17 percent higher than in 2007.
"This report shows an amazing recovery for the corn crop and we have pulled back from a crisis in food supply and crop availability," said Chris Hurt, Purdue University agricultural economist.
While production uncertainty has provided, and may continue to provide, some support to corn and soybean prices, demand concerns are beginning to weigh on prices. Declining energy prices and a sharp drop in ethanol prices mean that the breakeven corn prices for ethanol producers are now much lower. Prospects of large world supplies of feed wheat and a strengthening U.S. dollar suggest that U.S. corn exports could continue to be a little sluggish. The slowdown in the pace of the domestic soybean crush and a larger world vegetable oil situation are also indications of potential demand weakness.
