HardAssetsInvestor

Written by Julian Murdoch  |

September 03, 2009

Tale Of Two Grains

Details

Corn is down, soybeans are up (and down) and harvest is in sight. So what can go wrong now?

• Too much corn, not enough demand
• The ABC of soybeans
• Betting on the weather

 

Too Much Corn

 

Corn (C,CBOT) Daily

 

The price of corn is down, and it is all on supply news.

This spring, farmers put 87 million acres of corn in the ground, and even though planting was late (and, therefore, so was crop development), the current buzz is that it's going to be a bumper year.

As of the August 12 World Supply and Demand Estimates, the USDA is expecting 12.76 billion bushels of corn to be harvested this year, up from last year's 12.1 billion bushels. The jump comes both from the number of acres harvested (80 million this year, versus last year's 78.6 million) and projected yield increases (159.5 bushels/acre, compared with last year's 153.9). Of course, a successful harvest will depend on the weather staying warm and dry, but if it does, corn supplies are projected to hit a record 14.5 billion bushels.

All this means that there's plenty of corn to go around - probably more than needed, especially since the demand picture looks so dismal right now. Demand in the feed sector remains weak, and ethanol demand is questionable at best. Between tight credit and sub-$70 oil, the push for more ethanol is more of a nudge than a shove, unlike the days when oil was over $100 and credit was easy.

However, there is one question mark in the demand picture: high-fructose corn syrup. That compound, much maligned in "The Omnivore's Dilemma" and currently starring in a feel-good PR campaign by the Corn Refiners Association, is a cheap substitute for sugar. With sugar now over 23 cents a pound and possibly on its way higher, we could see new demand, as some food producers increasingly switch over to the lower-cost corn-based sweetener.

 

Soybeans Up (And Down)

 

Soybeans, Daily

 

Soybeans have a different story, and it's as simple as ABC: Argentina, Brazil and China. But first, we need to start at home.

The U.S. soybean supply is at its lowest in five years, with beginning stocks sitting at 110 million bushels in July. Compare that with last year's 205 million bushels, or 2007/08's 574 million bushels, and you can understand why analysts call the market tight.

Adding to last year's supply problems, Argentina suffered a drought and had a dismal harvest for the 2008/09 crop year (ending in June). Only 32 million tons of soybeans were harvested - a 33% drop from the 2006/07 crop of 47.5 million tons. (Brazil also suffered lower soybean production due to drought, although it wasn't hit nearly as bad as Argentina.)