COMMODITY INSIGHT GENERAL OUTLOOK Prepared by Commodity Insight
(May, 15, 2000) On Friday, May, 12, the USDA offered a glimpse of prices that farmers will receive for corn and soybeans if the coming growing season is problem free. If there are no drought-like conditions this summer or an early frost this fall, the USDA claims that farmers should receive $1.60 to $2.00 a bushel for new corn and $4.00 to $5.00 a bushel for new crop soybeans.
Those estimates are based on existing stocks of both grains coupled with "trendline" yields producing "normal" crops come harvest. Additions or subtractions will be made to both crops in terms of final production figures as we move further into the growing season.
What made those estimates particularly interesting and controversial is that on the close of trading following the release of those reports new-crop corn closed at $2.63-1/2 a bushel, $.63-1/2 to $1.00 a bushel over the USDA estimate. Yes, over the estimate!
More astounding were new-crop soybean prices where November futures ended the day at $5.79-3/4 a bushel. That was an even more eye popping $.79-3/4 cents to $1.79-3/4 cents a bushel over the USDA estimate.
If the USDA is correct that simply means that U.S. farmers could sell short or hedge this year's production at prices far and above where the market could be come the fall harvest. If Uncle Sam is correct in its price forecasts, the grain complex is without a doubt a, "bubble waiting for a pin!"
Few times in history have grain prices been so inflated at this time of the year when no crop problems exist and the coming harvest expected to be a record one. The USDA figures suggest that grains are inflated, overvalued or whatever else you wish to call them as long as you don't call them cheap!
New-crop corn production for instance, should be approximately 9.74 billion bushels, the 3rd largest in history. New crop soybeans are anticipated to be the largest in history a huge 12% above year-ago levels. In addition, stocks of soybeans will be the 2nd largest ever. The largest crop of soybeans coupled with the 2 largest stocks in history should not equal a bull market or equate to Nov. futures of $5.79-3/4.
Of course, that is but the first estimate given this growing season for new-crop grains. And obviously, it does not take into consideration changes in crop size due hot and dry weather, an early frost or the possibility of a wet harvest.
But still, in the absence growing problems this season, the USDA estimates should be a major warning sign to those bullish towards grains. Or to those grain producers un-hedged grains.
The grain complex could indeed be a legitimate "bubble." There is no other way of viewing the grain complex if the USDA estimates prove accurate. But only with hindsight will we know that for sure.
However, there was a bright light in Friday's Crop reports and it was with wheat. The USDA lowered world wheat stocks and thus, the long range picture for prices is bright. In particular when compared to the long-term outlook for soybean and corn prices.
But then again, those that read this column in this newspaper already knew that! I've been bullish on wheat for some time and continue to believe that is has excellent long-term potential. As I have stated several times, "wheat will outperform corn and soybeans well into the future as long as there are no signs of drought-like conditions for the Midwest."
I am also on record as stating, "long wheat and short the other grains could turn out to be, 'the trade' of the year. Or longer!"
My bias is that grain prices have a long way to go on the downside in the absence of crop problems this growing season. The latest USDA production estimates simply reinforce my bearish bias.
Adding to the long-term woes of the grain complex is the strength in the U.S. Dollar and the fact that the Federal Reserve is on a rate hiking binge that shows no sign of ending.
In today's, marketplace, there is no substitute for timely information.
May, 15, 2000 Jerry F. Welch, Publisher Commodity Insight 152 Ennis Lake Road, Ennis, Montana 406-285-3940
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