The main feature of this week has been a dramatic selloff in corn and beans due to fears about a prolonged shutdown of the port of New Orleans and along the Mississippi river terminals. Exports are a crucial part of the demand for corn and beans and uncertainty about how much damage was done and how long it may take to get back going was not friendly to the market. The market has a tendency to overreact to uncertainty (in both directions) and we are going to see that again. My hope is that the overreaction is behind us now; not still to come. There are over 25,000 power workers working to get power restored and more detailed damage assessments will be coming. The power company expects to have power back to “the mass majority” of customers by mid next week. The port resumed limited rail operations and some of the areas handling container shipping are expected to resume limited operations on Monday. The fear that this will change the balance sheet for this crop I believe is unfounded. Even after Hurricane Katrina, we still achieved our export projection for the year after repairs were made. This should be a short term snafu and not change the fundamentals.
The other bearish factor this week has been first notice day on the sept contracts. First notice day coming at the same time as the port shutdown was not kind to the market, but seasonally we often put the harvest low in during the delivery period of the sept contract so that can be encouraging in the longer term.
We have a USDA monthly supply and demand report coming out next Friday, Sept 10th. Typically NASS does not incorporate FSA certified acreage until the Oct report. But they just announced they have the data compiled and will make any necessary acreage adjustments on the sept 10th report. They also indicated they may continue to adjust acreage on the sept report every year. There is some risk of the acreage coming in higher but due to the drought in the western belt, there is also a lot of acreage that was chopped so higher acreage planted acreage does not guarantee higher acreage harvested for grain. This change adds a significant amount of risk to the crop report next week. However, if we stay below the old range in corn and beans, I think the market will have some amount of production increase already priced in so that this break may turn out to be a blessing.
TOn next Friday’s USDA report, they will also update yield. Yield estimates have been trending higher in the last few weeks with all the moisture that has come into the belt. Personally, I am still very skeptical about current estimates of corn yield, I think final yield will be lower than current estimates. The rain has certainly stabilized yield potential on the beans and kept it from going any lower. FC Stone came out with their survey results yesterday and put national corn at 177.5 (compared to 176.9 last month and USDA at 174.6) and beans at 50.8 (50.0 last month and USDA at 49). Below I have attached a table from FC Stone showing the yield breakdown by state compared to their estimate last month and with USDA’s last estimate. Stone comes to the higher national corn yield by finding higher yields in the hardest hit areas of the western corn belt, they are a bit below USDA in the eastern belt. With all these rains, I do believe we are adding a bit to soybean yields.
Brazil has very strong seasonal precipitation patterns. They wait for the rainy season then plant into the newly recharged soil. They can get started planting around mid September, as long as the rains have started. Normally they are very dry in the winter (during our summer) aptly called the dry season, but this year has been even more dry than normal. Their growing season is so long, it takes a very long delay to be really detrimental to soybean yields in itself but it will limit the amount of corn they can plant after the beans. The two week forecast looks very dry for the growing regions of Brazil right now (see precip map below). It is too early for this to move the market, but it is being closely watched. The water temp readings in the pacific are pointing to another La Nina year which may be detrimental to South American production.
What To Do
I would not be panic selling on a down day. There is no shame in selling here if you are forced to sell some. We are still at much higher levels than last year and very good levels historically. If we get a bounce off these lows into the USDA report next week, it would not be a bad idea to get some pricing done to take some risk off the table. That goes for both corn and beans. I am still bullish long term but it may take a while to get there and we need to manage some risk through harvest especially for those that will need additional cash flow.
Corn harvest is rolling in the Southeast now with lots of heat to dry the crop and little rain to slow us down. Yields are above average in most areas and basis will come under pressure. If you need to move more harvest bushels, GET BASIS ON THEM NOW!! Basis will recover after the combines get put away due to our massive corn usage, but that will not help you if you are out of space with corn still in the field.
Harvest basis for beans is historically high and there are good early premiums available. Rail values are dropping as harvest is approaching and the gulf is still a question mark. Sell harvest basis. Sell early basis if you are sure when you will be shipping.
Wheat
Chicago wheat has held on better than corn and soybeans have this week. Importers of wheat all around the world are being forced to increase the prices they are willing to pay as world wheat prices creep higher. All the moisture finally falling on the parched areas in the US was too late to help the spring wheat crop but will benefit wheat seedings. I think the balance sheet has tightened enough in the last three months to keep the market supported. With energy and fertilizer prices as high as they are, the market knows it has to be at a much higher level than years past to attract the same number of acres. Wheat is not a cheap crop to grow.
Oct basis has weakened at Southeastern flour mills but they all have very little coverage for Nov Dec and forward. I would not be afraid of getting some new crop hedges on between $7 and $7.50. The crop has not been planted yet so i am not recommending selling aggressively, but getting some hedges on at these levels would not be a bad idea. Hopefully it is the cheapest we sell!
Cotton
Cotton is finding support and moving back toward the upper end of its trading range. It appears the bulk of the damaging rains missed big cotton production areas. Cotton exports were good this week. Economic data out of China was not encouraging as they have shut down more of their economy than expected to try to stop the spread of the new cases. Cotton was able to shake off this bad news. I would be a seller of cotton above $0.95 and any move close to a dollar should be heavily sold.
