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Market Advisor: Will Increased Acres Translate Into Increased Production?

Futures markets often try to anticipate the information contained in key USDA reports and then respond to the actual report information based upon their expectations.

By Frayne Olson, Crops Marketing Economist

NDSU Extension Service

The June 30 U.S. Department of Agriculture’s Acreage and Grain Stocks reports provided a few surprises, confirmed suspicions and left several unanswered questions. In general, these reports were negative for grain and oilseed prices, even though some of the key estimates indicated reduced acreage or reduced inventory values.

Futures markets often try to anticipate the information contained in key USDA reports and then respond to the actual report information based upon their expectations. This sometimes creates price movements that are opposite from what would seem logical. For example, 2009 spring wheat acreage was expected to be lower than 2008 acreage. However, if the actual USDA estimate is lower than last year, but not as low as the traders expected, prices actually may fall rather than rise because the traders had overestimated the reductions.

Let’s look at some of the details contained in these reports before discussing the impact of the information.

Arguably, the most surprising number in these reports was the estimated 87 million acres of corn planted in the U.S., which was 2.9 million acres more than the average industry estimate and 1.1 million acres more than reported in the March 31 Prospective Plantings report. The largest increases came in Nebraska and Iowa when compared with the Prospective Plantings report. Even Illinois, which has had significant planting delays due to wet field conditions, showed an increase from the March report. Adding to the negative news was the estimated 4.26 million bushel June 1 available corn stocks, which was at the upper end of industry estimates.

Soybean plantings were expected to be higher and they were. The report estimates that 77.5 million acres were planted, which is 1.4 million acres above the Prospective Plantings report estimate. However, this was 800,000 acres below the average industry estimate, which should be long-term supportive for new-crop soybeans. South Dakota, Missouri and Minnesota had the largest increases from the Prospective Plantings report. The main negative news for soybeans was a larger than expected June 1 stocks estimate of 597 million bushels. This is low by historical standards, but slightly larger than the average industry estimate of 586 million bushels.

Spring wheat plantings were another surprise, especially for some farmers in eastern North Dakota. There are an estimated 13.77 million acres of spring wheat planted in the U.S., which is 468,000 acres above the Prospective Plantings report and 670,000 acres above the average industry estimate. North Dakota recorded 6.7 million acres of spring wheat, a 100,000 acre increase from the Prospective Plantings report. Montana had a 200,000 acre increase and South Dakota a 100,000 acre increase, when compared with the Prospective Plantings report. The stocks of all wheat classes were very close to industry estimates at 667 million bushels, which is above the previous five-year average of 484 million bushels.

Estimated Durum acres also were higher than those reported in the Prospective Plantings report. North Dakota planted 1.7 million acres of durum, a 100,000 acre increase. Montana showed a relatively minor decrease of 10,000 acres to 530,000 acres. This results in total U.S. durum plantings of 2.55 million acres. There also were an estimated 25.1 million bushels of durum in storage on June 1, 2009. This is significantly higher than the 8.29 million bushels in storage on June 1, 2008, but very close to the previous five-year average of 26.8 million bushels.

U.S. barley acreage was estimated at 3.63 million acres, down from the 3.95 million acre estimate in the March Prospective Plantings report. North Dakota barley acres were estimated at 1.2 million acres, which is 350,000 acres less than the March report. U.S. oil sunflower acres were estimated at 1.78 million acres, compared with 1.74 million acres in the March estimate. There were 847,000 acres of U.S. canola planted, which is 10,000 acres less than the March estimate. Total dry edible bean acres were estimated at 1.46 million acres, compared with the 1.55 million acre estimate in March.

The initial market reaction was negative for prices mainly due to the relatively large increase in corn acres. However, increased planted acres do not always translate into increased bushels. Once this new information has been incorporated into the markets, attention will return to weather forecasts, crop conditions and estimated consumption. Have the marketing year highs already been reached? Not necessarily, but the likelihood of another major price rally is dropping. It will take some unexpected event to trigger a rally.

The most likely source would be a major weather scare rather than a spike in consumption. Buyers of U.S. crops have become very price sensitive due to the world economic recession. They reduce consumption or shift purchases to another supplier if prices rise too high. A weather problem that has the potential to reduce average yields significantly changes the psychology of the markets and adds a sense of fear, which can spark a price raise.

One possible weather event that would be significant is a drought that impacts a major growing region. The current U.S. drought monitor (http://drought.unl.edu/dm/monitor.html) does not indicate any serious dry areas in the Midwest. However, the major crop-producing regions of Alberta and Saskatchewan in Canada are experiencing very dry conditions (http://www.agr.gc.ca/pfra/drought/nl_e.htm). This area is a major producing region for Canadian spring wheat, durum, barley, canola and field peas and needs to be closely watched.

Another possible weather problem would be a cool growing season that brings with it an early frost. Given the planting delays in the northern Plains and the eastern Corn Belt, a threat of an early frost could impact corn, soybean, sunflower and dry bean yields significantly. This would cause a price spike. Of these crops, damage to soybean yields would create the most excitement because of the current low carryover stocks and tight stocks-to-use ratio.

Price rallies caused by weather concerns may not last long, so take advantage of these rallies to finish old crop sales and price a portion of the expected new crop production. I hope that the price rally will not be caused by adverse weather conditions in your area.


NDSU Agriculture Communication

Source:Frayne Olson, (701) 231-7377, frayne.olson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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