The biggest move of the year could be a bear market in new crop soybeans, according to market analyst Richard Brock, Brock and Associates, speaking at Web cast following USDA's May 12 World Agricultural Supply and Demand Estimates.
While the market appears bullish with old crop U.S. ending stocks at 130 million bushels, new crop stocks are expected to climb by 100 million bushels by the end of this marketing year. World ending stocks for soybeans are projected by USDA at 51.8 million metric tons, which Brock says “is toward the high end” of trade estimates.”
In addition, Argentina and Brazil are expected to rebound from poor crops in 2008, “which could contribute to a downward trend in soybean prices,” Brock said.
Planted U.S. soybean acres could be higher than USDA's estimate of 76 million acres, according to Brock. “With a currently high-priced soybean market, producers will be encouraged to put marginal acres in soybeans. You can lock in $9 to $9.50 off the combine.”
Things could turn bearish for soybeans if 78 million acres are planted in the United States. “A 43-bushel yield would result in 319 million bushels in ending stocks. The biggest move of the year is going to be a bear market in new crop soybeans. We're not ready to start it today or tomorrow, but there is a huge downward trend coming in this market.”
Meanwhile, big surprise in USDA's May report was the lower carryover estimate for the 2009-2010 corn crop, at 1.145 billion bushels. “While this is not super bullish for corn, it certainly takes out the long-term bearishness in the corn market.”
World corn ending stocks, estimated at 128.1 million metric tons, “were a little on the tight side compared to 2008-2009.”
USDA has projected U.S. corn plantings of 85 million acres, harvested acres of 77.8 million acres and an average yield of 155.4 bushels per acre, which is slightly above last year's 153.9 bushels per acre. The higher yield estimate is a reflection of planting progress in the key states of Iowa, Nebraska and Minnesota, “which are way ahead of a year ago. It's from Illinois east that we're behind.”
Brock doesn't think corn ending stocks will shrink to USDA's estimate of 1.14 billion bushels. “I don't think we're going to ramp up ethanol plants to get to USDA's usage number of 4.1 billion bushels. That's a 150-million to 200-million bushel swing right there. USDA is also optimistic on corn exports for the coming year.”
Still, the U.S. corn market is looking at an overall decline in ending stocks. “So this report took out the long-term super-bearishness of the corn market and added some support. It's going to be hard to get this market below $3.50 to $3.75 in the next several months.”
A bullish scenario for corn is possible if only 83.5 million acres of corn is planted, according to Brock. “Ending stocks would drop below a billion bushels and corn prices could jump another 50 cents to 60 cents. A bearish scenario for corn is possible if 86 million acres is planted, and we get good growing conditions for the rest of the summer, and yields jump to 165 bushels per acre. I don't think that's going to happen.”
Brock estimates that wheat ending stocks will be higher than USDA's numbers. “We see ending stocks gradually increasing. It's going to be difficult to sustain any kind of long-term bull market in wheat.”
USDA projected new crop world cotton carryover at 57.7 million bales, which is down from the previous year's 62.31 million bales. “So there's a little bit of friendliness in cotton prices,” Brock said.
On the other hand, USDA may have underestimated U.S. cotton yield for the coming year, Brock says. “Last year's average yield was poor at 813 pounds per acre, and USDA is saying it's going to be lower this year, 805 pounds.
“But we're seeing some significant genetic improvements in cotton and we need to factor that in. I think a yield of 880 pounds is attainable.”
The higher estimate would result in ending stocks of 6.4 million bales versus the government's May forecast of 5.6 million bales.
Brock says any combination of factors pushing cotton ending stocks to around 4.5 million bales “would be bullish, but I really think we'll be closer to 6.4 million bales and an average price of 48 cents to 58 cents.”
Brock believes U.S. cotton acreage has completed its downward slide “and will begin to stabilize in the South and Southwest. By 2012, we'll start seeing growers coming back to cotton.”
Brock says USDA's projected decline in the stocks-to-use ratio for cotton “tells me we have a long-term bottom in cotton. This is not a market to be bearish long-term. I don't think we take the market below 48 cents, but it's not out of the realm of possibility.”
Brock added a few words of caution for farmers trading in today's commodity markets. “Be very careful and remember that price strength at this time of the year is a bull trap. While prices could go higher in the next week or two, be cautious. I don't think it would necessarily be the beginning of a long-term bull market.”