Grain Prices Require Substantial Support to Overcome Bearish Fundamentals

Yesterday morning, the USDA published their annual Prospective Plantings report and their quarterly Grain Stocks report, which provides market participants with key fundamental information to better position themselves for the upcoming season. Here is a summary of the estimates and price implications:

Corn
Corn acreage intentions are down 1% from 2008 plantings to 85 million acres, slightly higher than the trade’s expectation of 84.548 million. While the consensus for a reduction was realized, this is still an impressive number in the face of expensive inputs, tight credit and a locked-in soybeans:corn ratio that favors bean acres for most growers’ crop insurance policies. While total stocks are up only 1% over last year, “on-farm” stocks (held at mills, elevators, warehouses, terminals, and processors) are up 8%, and off-farm stocks are down 7% year-over-year. This tells us that growers will still be looking to sell into price rallies to unload their remaining old crop.

Soybeans
Bean acreage intentions are up marginally from 2008 plantings to a record 76 million acres. This number is 4% lower than the trade’s expectation of 79.251 million. On-farm stocks are up 11% versus last year, while off-farm stocks are down 23% from 2008, reflecting marginal Chinese purchases diverted to the US from South America. This boost in demand is attributable to the farmers’ strike in Argentina and drought impacts for both Argentina and Brazil. The combination of record soybean acres and a return to normal export balances later this year implies a substantial expansion of US supply for 2009/10.

Wheat
Spring wheat acreage intentions are down 6% from 2008 plantings to 13.3 million acres. However, the wheat story is dominated by ever-growing supplies: on-farm stocks are up a whopping 205% over last year, while off-farm storage is running 23% above last year’s levels. The price effect of this supply surplus is exacerbated by the weakening demand picture. The USDA’s recent estimate of wheat-consumption-for-food was reduced to its lowest level since the 2005-06 marketing year. The weather risks to winter wheat and spring wheat this year will have limited impact on prices until renewed consumption can eat through existing supplies.

Bottom line: grain prices will require substantial support from a weaker dollar and institutional investment to overcome bearish fundamentals.