Ag Weekly Online: Twin Falls, Idaho

On November 10, the USDA released the much anticipated USDA supply/demand report. The USDA forecast corn production at 12.9 billion bushels, down 1 percent from last month but 7 percent higher than 2008. Based on conditions as of November 1, yields are expected to average 162.9 bushels per acre, down 1.3 bushels from October but 9.0 bushels above last year. Despite the drop in yield from October, this yield will be the highest on record if realized. Total production will be second highest on record, only behind 2007. Within the Corn Belt, forecasted yields in Minnesota and Wisconsin increased, while Illinois, Iowa, and Michigan yields decreased.

Since 1981, there have been eight previous years of corn production increases from the September to October reports. In all of those previous years, the USDA also increased production into the November report. This year will be the exception as the USDA lowered production from last month. This will still be the second largest crop in history but the highest yield. In seven of those eight previous years, the USDA has also increased the final production figure from the November report into the final report in January.

The USDA left the old crop feed and ethanol estimates unchanged this month. The only demand revision was a 50 million bushel reduction in exports to 2.100 billion bushels. This partially offset the 97 million bushel reduction in the crop size, allowing 2009/10 ending stocks to slide 47 million bushels from last month to 1.625 billion. This still represents a nearly unchanged stocks situation from last year, but a slightly tighter stocks/usage ratio of 12.5% vs 13.9% in 2008/09. The ending stocks revision was marginally more than the average trade estimate looking for stocks at 1.650 billion bushels.

The USDA forecast soybean production at a record high 3.32 billion bushels, up 2 percent from the October forecast and up 12 percent from last year. Based on November 1 conditions, yields are expected to average 43.3 bushels per acre, up 0.9 bushel from last month and up 3.6 bushels from 2008. If realized, this will be the highest U.S. yield on record. Compared with last month, yields are forecast higher or unchanged in all States except Arkansas, Georgia, Iowa, Mississippi, and Texas. Increases of 3 bushels are expected in Delaware, Indiana, Kansas, and Maryland.

The largest decrease in yield from the October forecast is expected in Mississippi where excessive rain during October hindered yield expectations. If realized, the forecasted yield in Alabama, Kansas, Kentucky, Nebraska, Ohio, and Pennsylvania will be a record high and the forecasted yield in Georgia, Maryland, and North Carolina will tie the previous record high. Area for harvest in the U.S. is forecast at 76.6 million acres, unchanged from last month but up 3 percent from 2008.

For soybeans, since 1985, the USDA had increased the production estimate six times and all six years, the USDA increased production into the November production figure. This held true for 2009 as well. The USDA forecast a record large soybean crop and the highest yielding crop in history. The USDA also forecast a record Brazil soybean crop at 63 mts.

On the demand side, the USDA raised crush by 5 million bushels to 1.695 billion, raised exports by 25 million to 1.325 billion, raised residual usage by 2 million and lowered imports by 2 million. The net demand revision was a 26 million bushel increase from last month, partially offsetting the 69 million bushel increase in production, for a net increase in 2009/10 ending stocks of 40 million bushels to 270 million. This was also modestly higher than market expectations of 235 million.

The USDA resurveyed spring wheat producers after the September small grains report as the late harvest did not allow for an accurate survey of final production figures. USDA lowered the “other spring” wheat crop to 584 million bushels from 587 million bushels previously. The USDA revised the U.S. wheat crop to 2.216 bb from 2.220 bb last month, but lowered exports by 25 mb, resulting in an ending stocks figure of 885 mb, the highest stocks in ten years and the highest usage ratio (42%) since 1987/88.

CORN ANALYSIS

Corn closed the week $.23 1/2 higher. As producers focused on finishing the soybean harvest, corn values

were able to rebound. With harvest beginning to pick up next week, harvest pressure against the corn market

should increase. The USDA estimated the U.S. corn harvest is now just 37% complete vs. 25% last week, 69% last year and 82% average. The states of Iowa 34%, Illinois 31%, Minnesota 23%, Indiana 41% and Nebraska 30% are the largest corn producing states and are all well behind the normal pace. With so little corn harvested, the trade has to believe that if farmers can harvest this crop, significant harvest pressure will eventually hit the market. Technically, corn has hit a 62% retracement level on harvest delays, which mandates producers increase their marketing efforts.

The weekly export sales report showed net sales of 488,500 MT were down 13 percent from the previous week, but up 9 percent from the prior 4-week average. Increases were reported for Japan (303,500 MT, including 151,500 MT switched from unknown destinations and decreases of 39,600 MT), Canada (82,700 MT), Guatemala (71,500 MT), Mexico (28,900 MT), the Dominican Republic (23,000 MT), Venezuela (18,500 MT), and Colombia (17,100 MT). So far, this year’s sales are outpacing last year’s figures, 722 mb vs. 686 mb. The US needs to export 33.2 mb each week to reach the USDA forecast. The sentiment index has reached 96%, the highest level since June 2008 when the long term highs were established.

STRATEGY & OUTLOOK

Producers should have added additional hedges at the 62% retracement of $4.09. Cash sales should be increased to the 70% level while put options should be rolled up to maximize protection levels. The market is providing an incentive to sell the crop at strong basis levels and an opportunity to re-own the crop on a pullback once harvest pressure hits the market.

SOYBEANS ANALYSIS

Soybeans closed the week $.36 higher. As harvest has progressed, producers continue to report excellent yields. Strong demand has underpinned prices and producers are considering selling soybeans and re-owning with futures or options as there is little to no carry in the market to encourage producers to store soybeans.

The USDA reported U.S. soybean harvest jumped to 75% complete vs. 51% last week, 91% last year and 92% average. The largest soybean states, Iowa 83% and Illinois 69% and Minnesota at 77%, indicate soybean harvest is winding down in the main soybean states. The weekly export sales report showed net sales of 1,272,500 MT were up noticeably from the previous week and up 82 percent from the prior 4-week average.

Increases were reported for China (961,200 MT, including 168,600 MT switched from unknown destinations and decreases of 147,600 MT), Japan (126,700 MT, including 54,000 MT switched from unknown destinations), Mexico (85,700 MT) and Canada (84,400 MT). This year’s export profile remains well ahead of last year’s record pace, 907 mb vs. 574 mb. The U.S. only needs to export 9.3 mb each week to reach the USDA forecast of 1.305 bb. Planting season in Brazil is off to a record pace at 48% planted as of November 13. The average pace is 36%. Additional pressure against the soybean market should weigh on values before end user demand establishes the fall low.

STRATEGY & OUTLOOK

Producers should have increased new crop hedges to the 70% level. With the tight basis levels and lack of carry in the market, the market is telling producers to sell the product now and use price weakness to re-own the crop with futures and options.

WHEAT ANALYSIS

For the week, Chicago wheat closed $.41 3/4 higher; Kansas City wheat $.39 1/2 higher and Minneapolis wheat $.37 1/2 higher. Despite the confirmation of bearish U.S. and world ending stocks, wheat values rallied last week on major short covering by the funds as technical charts were oversold. Since there is no fundamentals to support higher prices, look for values to work lower. U.S. winter wheat planting advanced to 79% this week from 76% last week and compares to 88% last year and 90% average.

The winter wheat crop conditions report shows 64% of the winter wheat is in the good/excellent category, up 2% from last week but below last year’s ratings of 67%. The weekly export sales report showed net sales of 412,200 metric tons were up 45 percent from the previous week, but down 5 percent from the prior 4-week average. Increases were reported for unknown destinations (157,400 MT), Nigeria (54,300 MT), Tunisia (34,500 MT, including 10,300 MT switched from Italy), the Dominican Republic (32,900 MT), Egypt (32,000 MT, including 30,000 MT switched from unknown destinations), South Korea (24,500 MT), Venezuela (21,000 MT), Morocco (17,000 MT), and Mexico (13,800 MT). This year’s export forecast remains way behind last year’s sales profile, 503 mb vs. 715 mb. The U.S. need to export 12.42 mb each week to meet the USDA forecast.

STRATEGY & OUTLOOK

Producers should have now sold/hedged all of their 2009 crop when KC wheat reached the long term price objective of $6.80 to $7.00. Producers should have used a combination of hedges, options and cash sales to manage price risk. Producers should exit long hedges and should have made new sales/hedges on the retracement levels.

LIVE CATTLE ANALYSIS

Live cattle ended the week $1.67 lower while feeder cattle ended $1.50 lower. Cattle closed lower on weak cash trade last week. Packers remain adamant they have plenty of contracted cattle signed through the end of the year and will not be needing to bid up the cash market to get the cattle. The cash cattle trade occurred in the southern Plains last week at $85.00 per cwt, $3.00 lower with the previous week’s trade of $88.00. Nebraska fed cattle traded at $132, $3.00 lower compared to the previous week’s cash trade of $135. Cash feeders at the closely watched Oklahoma City auction were steady to $2.00 lower this week compared to last week.

The USDA raised its 2010 beef export forecast by 80 million pounds to 1.925 billion pounds, a 5.5% increase from 2009 levels. On the other hand, 2010 beef imports were lowered by 80 million pounds to 2.795 billion pounds, which still represents a 3% increase from 2009 levels.

STRATEGY & OUTLOOK

Producers should have price protection through a combination of options and hedges through the first quarter of 2010. Demand remains soft, so continue to hedge cattle as they are purchased. Producers especially need to have the month of April covered as there will be a large amount of market ready cattle in the month of April.

LEAN HOGS ANALYSIS

Lean hogs closed the week $.70 lower. Last week, lean hog futures closed the week slightly lower as the market is anticipating lower cash trade in the weeks ahead. Traditionally, packers will slow the slaughter pace ahead of the Thanksgiving holiday as they try to keep cash trade soft around the holidays. The USDA November report contained very small changes. Pork production for 2009 was increased slightly by 43 million pounds to 23.073 billion pounds, now 1.3% lower than a year ago but still the second largest amount of pork ever produced.

Pork production for 2010 was left unchanged at 22.455 billion pounds, 617 million pounds or 2.7% less than 2009 levels. Pork exports for 2009 were lowered slightly by 25 million pounds to 4.135 billion pounds and left unchanged at 4.450 billion pounds for 2010.The average Iowa-Minnesota hog weight for last week was estimated at 271.3 lbs versus 270.4 lbs previous week and 267.0 lbs last year. Notice the sentiment index is now at 100%, the highest reading possible. The last time the index was this high was when the highs were formed in August of 2008.

STRATEGY & OUTLOOK

Producers should now be hedged near $54 or covered the downside with put options if producers want to leave the upside open. Producers should be 100% covered through February with either futures or options or a combination.

Extend coverage through the 2nd quarter of 2010. Extend coverage through June.