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Economist: Grain markets ‘simply ominous’

June
16, 2008

The squeeze on world grain stocks will
continue at least for several years. And to prevent further ending stock
slippage, everyone should be praying for a perfect weather the rest of this
growing season.

That’s
the verdict of Keith Collins, who, before retiring in January, served for 15
years as USDA’s chief economist.

“I’ll
focus on the basic outlook for commodities in the upcoming year of 2008-09,”
said Collins, in a recent press conference sponsored by the Environmental
Working Group. “I’ll use the USDA views of the 2008-09 view for major crops,
which is the most important global benchmark for what’s likely to happen.”

Having
worked at the USDA, “I understand where the numbers come from. So, it’s a comfortable
place for me to start.”

Predictions
are tricky and many things will determine how markets turn out this year.
However, there are some givens: “Biofuel expansion is critical; global income
growth, the value of the dollar, governments protecting their markets and the
weather will all be factors.”

In
the coming year, among major crops, the U.S. and global wheat market balance improves the most.
But corn and other feed grains are expected to move to a level of “extreme
tightness that’s rarely been experienced in our history.”

The
current wheat-marketing year ended May 31. At that point, U.S. wheat stocks were at 10 percent of total U.S. use of wheat over the past year. That equates to
about a one-month supply.

“So,
it’s very tight and has meant record-high wheat prices.

“Looking
ahead to 2008-09, global wheat production is expected to be up 50 million tons,
about 8 percent. I believe the U.S. crop is faring pretty well and (northern hemisphere)
crops in foreign countries are also faring well.”

Collins
believes a rebound in global wheat production seems quite likely. If realized,
“U.S. wheat stocks at the end of 2008-09 would increase to
22 percent of use — or an 80-day supply. That would provide relief but would
still leave supplies well below average. And the firm level wheat price is
forecast at yet another record — $7.35 per bushel.”

For
market analysts and consumers, the corn and feed grain markets for the coming
year “simply look ominous. I don’t know of a better word to describe it.

“We
had record-high corn production last fall. Despite that, when the corn year
ends Aug. 30, our corn stocks are expected to be up only slightly.”

Meanwhile,
this year, total corn use is at a record high. That has led to a record farm
price expected to average $4.25 per bushel.

As
worrisome as this year has been, “I think the prospects for 2008-09 look much,
much tighter. Using acreage that farmers said they’d plant in the March
planting intentions survey — and we won’t know the final numbers until (later
in) June — but because of cold, wet weather that delayed planting, yields are
expected to be slightly below trend.”

With
lower acreage and little yield expansion, U.S. corn production is expected to fall well short of
total corn use. “Ethanol demand is forecast up another billion bushels — equal
to 33 percent of 2008 corn production. And stocks would fall to only 6 percent
of use — a 22-day supply, the second lowest in the past 49 years.

“Farm-level
corn prices are expected average a new record high of $5.50 per bushel.”

On
soybeans for 2008-09, “only a modest increase in carryover stocks is expected
from this year’s low level. That’s despite an expected 11 million more planted
acres this spring. Soybean prices are projected to be up again and average
$11.25 per bushel.”

Looking
at these prospects, Collins notes three key implications:

•
Wheat markets are likely to get some relief from tight supplies, “although
prices will remain high and we’ll be very dependent on the weather in southern
hemisphere wheat, which is only now being planted.”

•
The corn and soybean markets will not allow stocks to bounce back to normal
after a year or two. “Growth in biofuel production is going to ensure that we
face persistent tightness and high prices for at least several years. For
example, looking ahead to 2009, we’ll need 5 million, or more, additional corn
acres just to keep stocks at the historically low level expected in 2008-2009.
“So, corn with low stocks and high prices will be trying to pull acres from
soybeans, which also will have low stocks and high prices.”

•
There’s “virtually no cushion” for any type of significant weather-reduced· crop — especially corn. “The forecast of the second
lowest stocks-to-use ratio in 49 years already assumes that U.S. corn exports will be down by 16 percent and feed
residual use will be down by 14 percent in 2008-09.”

The
rest of the world needs grain and oilseed. “I think they’ll be looking toward
the United
States.
If we don’t pull a (good) crop, particularly corn, domestic users — both feed
and fuel users — are highly vulnerable to serious financial problems. This
could cause very serious disruptions both to livestock producers and ethanol
production.”

Collins
is uncomfortable predicting yields. “But I will say, that just looking at an
empirical yield distribution for corn, you can conclude that about one out of
every seven years we have a yield reduction of 15 percent, or greater.”

What
would a 15 percent yield reduction do to the 2008 crop? “It would reduce yields
by about 23 bushels per acre and reduce production by about 1.8 billion
bushels. So we’d have to reduce demand or stocks by 1.8 billion bushels below
the current levels we’re projecting, which are already low.”

Very
little of that could come out of stocks, says Collins — maybe 200 million
bushels. “We’d have to take about 1.5 billion bushels out of an already reduced
export level, feed-use level and/or ethanol. And, of course, with ethanol we
face the (federal use) mandate so it can’t be taken from there unless the
mandate is waived.”

And
that isn’t all. Collins says his “instinct” is that more surprises are to come.
“As I look out over the next couple of years and scratch through supply and use
scenarios for corn, soybeans and wheat, they look like persistently tight
markets for two, three and four years with little ability to rebuild stocks.”

We
can live in that environment. “Not easily, but you can live with high prices
provided there are normal yields.”

There’s
“every likelihood” crops won’t achieve normal yields in one, or more, of those
years. “So, it seems to me we will see more surprises.”

After
all, the latest market conditions are a surprise. “We didn’t anticipate this.
No one, a couple of years ago, was forecasting $5.50 corn for this year …. Most
of the average prices (predicted) for the next five years were in the range of
$3.70 to $3.90 per bushel for corn. Now, when you look at the cash and futures
markets, we’re in the range of $5.50 to $6.30 — and that’s without bad weather.”