USDA shows its optimism on corn, traders show doubts

August 13, 2008

ohio-corn-field.JPGThe government came through with good news for world grain users, food aid buyers and food inflation watchers on Tuesday, forecasting bumper crops of wheat, corn and soybeans and easing the fears of many who thought a cold rainy spring and worst U.S. Corn Belt floods in 15 years during June would spell heavy crop losses.
    There was only one problem: the markets don’t believe it. After a day and a half, Chicago Board of Trade corn prices are up 8 percent, soybeans up 7 percent and wheat up 5 percent.
    The bounce in the markets, which has come despite a stronger dollar (bearish for export demand), has been a reflection of doubts among long-time crop watchers about USDA’s assumptions for yields and weather.
    Analysts had been forecasting a rise in corn production from USDA’s July report for weeks given the greenhouse-like conditions ideal for Midwest corn since early July.
    What they did not expect was the magnitude of the USDA’s optimism. USDA boosted its corn yield forecast to 155 bushels per acre, up a whooping 6.6 bushels from its July forecast.
    And that was after a special USDA phone re-survey of thousands of flooded out areas hit in Iowa, Illinois, Missouri, Minnesota and other corn states in June.
    The aggressiveness of USDA’s yield boost stunned even the most veteran CBOT grain traders given the immaturity of the crop and unpredictability of Mother Nature.
    Both corn and soybeans are more vulnerable to an early frost since their development is running one to three weeks behind normal after a wet spring followed by flooding in June. The biggest threat is a freeze in September, weeks before many crops mature and a normal October frost in the upper Midwest.
    And given the tendency toward cool Midwest weather this summer an early freeze of plants – and yields – is seen more likely than other recent years. 
    The National Weather Service will issue its September forecast for temperatures on Aug. 21.
    Even U.S. Secretary of Agriculture Ed Schafer told Reuters in an exclusive interview on Tuesday following the report: “We look at the crop reports today and they’re good. But you also note that they are good assumed on normal weather patterns. If we start getting some early winter, early frost — things could change.”
    But so far so good. Corn conditions have improved for the past several weeks, benefiting from the cool, moist summer.
    Soybeans have a different story as USDA cut its forecast of that crop 27 million bushels to 2.973 million — reflecting a 2.6 percent drop in expected yields to 40.5 bushels per acre.
    However, all CBOT traders and analysts know that the bean crop is “made” in August, not July, so it is premature to get too excited about that number, analysts warned.
    “There’s the potential for the crop to come up substantially from the USDA number. But that’s going to be a function of weather over the next couple months,” said Mario Balletto, Citigroup grain analyst.
    Bottom line: the world is counting on the United States to produce a bountiful crop this year. World inflation is rising, driven by historically high energy and food prices.
    The weeks ahead promise more price volatility but many economists believe we’re in a new era of higher food and energy prices. Even with the pullback in prices before USDA’s report, corn and soybean futures are well above double their historical price ranges.
    USDA’s Tuesday increases in the outlook for corn demand for ethanol and soyoil demand for biodiesel did nothing to ease concerns that biofuels will remain an unwelcome competitor for food processors and livestock feeders in the years ahead, putting a floor under prices on pullbacks.

PHOTO: Corn fields pollinating 20 miles south of Toledo, Ohio, on August 9. Taken by Peter Bohan.

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