Hot, hot, hot! The pretty well sums up the weather outlook for this week and perhaps expectation for the market. But history clearly shows that weather markets like the one the corn and soybean markets are experiencing usually end when you least expect them to, and the retreat in prices can be much more rapid than expected. Therefore, farmers who are fortunate enough to have good-looking crops need to stay on their toes and be ready to reward this rally with at least light sales. Unfortunately for growers in hard-hit areas like northern Illinois, there’s won’t be much of a corn crop to sell and the yield prospects for soybeans are very much in question.
As illustrated by the Sunday night rainfall totals, the dominant Midwestern weather pattern remains entrenched. Many fields west of the Mississippi River received very timely and beneficial rains, while only widely scattered showers fell further east. This pattern could change at any time, but there is nothing in the near-term or intermediate-term forecasts to suggest it will. And all weather watchers agree temperatures will be on the warm side of normal for at least this week.
Although not unexpected, last Tuesday’s revisions in USDA’s supply/demand balance sheets for soybeans and corn made those two markets a little more goosey about yield reductions. The 2005/05 soybean carryover was trimmed to 290 million bushels, which means that since February that estimate has fallen by 150 million bushels—thanks mostly to strong demand. The new projection is not a particularly small number—if the national average yield is close to the historical trend-line which is a shade under 40 bushels per acre. But if you start shaving a bushel or two off the expected yield, a tight-supply scenario can be created. Until November soybean futures move above $7.70, there is no reason to think the market has totally bought into that tight-supply scenario.
On the other hand, the corn market appears to have factored in a great deal of yield loss. With December futures close to $2.60, a national average yield of about 132 has been factored into prices versus trend-line expectations of about 145 bushels. Even with an almost total loss in some Illinois counties and damage in surrounding areas, that’s strikes us as a low yield estimate. Reason: Much of the western Corn Belt appears headed for record-high corn yields.
Wheat futures are having a hard time staying on the coattails of the corn market. That’s partially because USDA has predicted record spring wheat yields. Like the western Corn Belt, the northern Plains have been blessed with frequent and often substantial rainfall. Even with a downward revision in the winter wheat crop estimate, USDA raised total wheat production to more than 2.2 billion bushels or 50 million more than in 2004. Wheat demand is okay and holding steady, but adequate supplies limit the upside potential for prices.
The big news in the livestock and meat markets last week was the court order to reopen the border to Canadian live cattle. USDA is urgently working on regulations for the importation of cattle under 30 months of age. This has the greatest impact on the feeder cattle market. Without Canadian-born feeders, the supply of replacement cattle has been tight. It looks like that’s about to change and is the reason prices took a dive late last week. The reopening of the border will also have an impact on the fed cattle market, but not as much as concerns about domestic beef demand during the “dog days” of summer. Also, the Japanese market remains closed to U.S. beef due to BSE concerns.
Anticipation of increased competition from beef tugged at cash hog prices and hog futures last week, but the disappointing summer price action in that market runs deeper than that. Pork demand simply was not able to hang onto last year’s impressive gains. And although production is not all that large compared to a year ago (last week’s kill was 2% smaller than the same week last year), it’s almost a sure bet that the annual pork production total for 2005 will be record large. It was mildly encouraging to see average hog weights drop last week, but that happens every summer when hot weather hits. The average live weight of all federally inspected hogs was still 5 pounds heavier than a year earlier.
Brock Associates is a commodity advisory firm that works with farmers, farm owners and agribusiness firms to develop hedging programs to sell or buy commodities. Brock Associates publishes The Brock Report, a 24-page weekly newsletter, and www.brockreport.com