A Big Bearish Day For Ags

July 01, 2009

The USDA released its Acreage report Tuesday morning and the market got its first gooad look at where final acreage stands for many key crops.

  • Soggy spring no biggie for corn
  • Record soybean plantings
  • Oversupplied in wheat


After expecting lower numbers due to rain-slowed plantings, the market reacted to the news that it looks like we're heading for another bumper year - assuming historical harvesting trends hold true.



After a truly wet, soggy spring that threatened to send farmers running from corn to soybeans, it seems the concern was for nothing. Corn acres planted are estimated to be 87.035 million for the year - up 1.2% from 2008. And even though that's 7% lower than 2007's record ethanol-fueled plantings, it's still good enough for second place.f The corn acres expected to be harvested this year are up 1.9% from 2008 as well, to 80.107 million acres. On June 10, the USDA estimated that the 2009 corn yield would be 153.4 bushels per acre - a scant 0.3% lower than the yield in 2008. Doing the math, that puts the 2009 corn crop at 12.29 billion bushels - up from previous estimates of 11.9 billion bushels previously reported.

Put together, it comes down to this: Lots of corn going in the ground, increased survival in the field, and yields where they should be. That means plenty of corn on the market, come harvest.

While this might make ethanol plants and food manufacturers and feedlots happy, corn traders were not happy - by 10:52 a.m., the most active contract, December 2009, had fallen the exchange limit of 30 cents to $3.6725 a bushel. Prices could go even lower. The Financial Times quoted Richard Feltes, head of research at MF Global, as saying December corn could drop as low as $3.35 "in the absence of crop adversity."


Corn (C, CBOT)

Corn perfomance Feb-June 2009 



The numbers for soybeans are also bearish, but the market didn't have the immediate gaping horror reaction.

Acres planted with soybeans rose 2.3% to 77.483 million, compared with 2008's 75.718 million acres - a record for soybean acreage. Twenty-two out of the 31 states that grow soybeans increased their plantings compared with last year. Add to that the fact that the USDA is forecasting a slightly lower rate of crop loss (1.2% vs. 1.4% for 2008) and that could translate into a record harvest area of 76.547 million acres. The other important statistic to look at would be yield estimates, but it is too early to call with harvest not starting until November, but even with an average harvest, the increase of 2.6% in area harvested means U.S. soybean supply is up.

The big difference in soybeans is that demand is much firmer than in corn, so while the initial market reaction was dramatic, it recovered quickly. Grant Kimberly of the Iowa Soybean Association points to strong soybean demand, explaining it this way:


"This report does not provide a supply cushion," Kimberley says. "While these acres may help to increase supply modestly, the cushion will not be as great as some may have expected. Achieving trend line yields or greater will be most important to achieving adequate supply."


Soybean trading was confused because of this. The most active contract, November 2009 - when the new harvest comes in - dropped 2% to $9.64½ per bushel. Immediate July soybeans, on the other hand, traded up above $12 a bushel because of current demand and current tight supplies. That's why they're called "futures."

A note about the difference between acres planted and area harvested: Farmers always know that not all of the acres they plant will make it to harvest - be it because of disease, frost or flooding. The USDA accounts for this by looking at historical statistics and working some statistical magic to come up with a forecast of area harvested. If the growing season is better or worse than expected, that number changes. For soybeans, if July and August are wetter than normal, the risk of rust increases - that lovely blight that can spread through the crop, reducing yields or causing whole fields to be written off as a loss. If the weather performs as usual as hot and dry, the soybean harvest should be a good one.


Soybeans (S, CBOT)

Soybean performance Feb - June 2009




The wheat numbers are a classic case of needing to read underneath the headline numbers to understand market reactions.

Acres planted with wheat dropped 5.3% to 59.775 million acres, compared with 2008's 63.147 million acres. The USDA is forecasting a whopping 15.6% of all wheat acres planted this year not make it to harvesting - compared with 11.8% last year. Between the lower acres planted and the larger forecasted acreage loss, the USDA is expecting 9.4% fewer acres of all wheat to be harvested this year.

Winter wheat accounts for 72.7% of all wheat planted. It also accounts for the highest rate of lost acres - the USDA forecasts that 19.9% of acres planted with winter wheat will not be harvested in 2009, likely due to the wet spring. In 2008, 14.4% of acres planted with winter wheat were not harvested.

With all of these decreases, you'd think the picture would be bullish for wheat. Nothing could be further from the truth. Analysts, and the market, see the report as very bearish, citing ample current stocks and weak demand. As of 1:44 p.m. Tuesday, the most active contract, Sept 2009, was down 17 cents to 540 6/8 cents - down from the previous day's close of 557 6/8 cents. The July contract briefly hit a six-month low of $4.9575.


Wheat (W, CBOT)

Wheat performance Feb - June 2009



So the most active contracts for corn, soybeans and wheat are all down on the acreage report. Traders will be watching the weather reports to see how these commodities will react as we progress through the growing and harvesting seasons.


What About MOO?

We've been looking at a lot of pick-and-shovel plays around here lately, so the chart I watched most closely yesterday was the Market Vectors Agribusiness ETF [NYSE Arca: MOO], which tracks a wide range of agribusiness. The challenge with MOO, often, is understanding how crop-specific news will hit the companies inside the ETF. Well, yesterday at least, it was pretty clear. MOO lost almost 2% on the day.



Market Vectors Agribusiness ETF


But considering how low MOO went this past fall, shaving half a buck off the price on dismal news seems like victory.



Market Vectors Agribusiness ETF as of June 30 2009



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