Following the USDA's Prospective Plantings report, the grain market rallied significantly. Planned soybean acreage at 76 million acres, was viewed bullishly as the trade was expecting, on average, 79 million acres. Corn acreage wasn't as large as many believed it would be either, so that also was seen as supportive. The report showed that producers intend to plant 85 million acres of corn.
“I believe the rally following the report is one for grain producers to sell, and for livestock producers to sit on the sidelines and wait for a better buying opportunity,” says Darrell Mark, Extension Livestock Marketing Specialist, University of Nebraska. Mark looks for a more bearish market to come, for a couple reasons.
“First, at 85 and 76 million acres of corn and soybeans, respectively, the supply and demand balance sheets for crop year 2009/2010 are not terribly tight, using USDA's forecasts from the late February Outlook Forum,” says Mark. “In fact, the ending stocks on soybeans should grow somewhat from their very tight levels the last two years.”
“Secondly, the total numbers of acres that farmers intended to plant to the principal crops was almost 8 million acres lower than the actual planted acreage in 2007 and 2008,” Mark continues. “While it is possible to see some decline in total acres planted this year due to lower prices, I think that a good portion of that 8 million acres not reported in the intentions will end up being planted.”
Mark feels that a lot of those acres will go into corn and soybeans -- especially given the rally in prices following the report. “There might be buying opportunities for pork producers more into that May to June time frame if we don't have a significant weather problem develop,” Mark predicts. “However, if we were to have a widespread weather problem like last year, it would be quite possible to see the market rally significantly,” he cautions.
If a crop weather scare develops this summer, Mark believes it would be prudent for livestock feeders to remain on the sidelines buying only short-term needs. “With the genetic technologies we have in seed these days, the national yield isn't terribly susceptible to weather risk.”
By the time the growing season ends, the bushels will likely be there, and a good crop could push prices lower, the economist predicts. “Livestock producers who are worried about this, though, or who may be highly leveraged, could think about buying some out-of-the-money calls to protect themselves,” he adds.
Mark believes the factors influencing corn and soybean costs in the next couple of months on the supply side are planted acres and yield. “I tend to think that planted acreage will grow between now and June, so that should favor buyers. On the yield side, weather risk is the wildcard.”
“On the demand side, ethanol use may start increasing, especially if we are to meet the renewable fuels standard in 2010,” Mark adds. “The ethanol plants that were liquidated through bankruptcy have been in ‘hot idle’ status and should be able to begin producing and buying corn quickly upon new owners taking over the plants.”
The contraction in the livestock sector has reduced production to the point where the economist sees some light at the end of the tunnel. “We have seen enough reduction across the red meat and poultry sector at this point that we could see price improvement spur some expansion,” he says. “If we start seeing some sustained improvement in the general economy, livestock prices could respond quickly, and we could see the contraction phase end. However, heavier weights and production efficiencies have been making up for much of the lower inventory numbers we’ve been seeing.”