Hackett Advisors in the News

Corn, soy futures soar on lower stocks report

Assistant Editor

MINNEAPOLIS, Minn. — The pressure is on U.S. corn from livestock producers trying to decide when feed will be affordable enough to expand their herds, and ethanol processors keeping one eye on yields and the other on the U.S. Environmental Protection Agency (EPA) for a decision on raising the national minimum ethanol-gasoline ratio from E10 to E15 or even E12.

Chicago Board of Trade (CBOT) corn futures across the board ended limit-up Friday and were still climbing Monday morning at press time, on the USDA’s dropping its estimate of this season’s harvest to 12.66 billion bushels – nearly half a billion bushels, or almost 4 percent, from its September report.

The Sept. 1 figure of 13.16 billion bushels was itself down 2 percent from the Aug. 1 estimate, but that decrease was only around 205 million bushels and still projected to be a record U.S. corn harvest.
“Which just goes to show you (the USDA) didn’t have a handle on things in August and September,” said Peter Georgantones with Investment Trading Services in Minneapolis. “I’m still shocked they knocked six bushels an acre off the yield (from 162.5 to 155.8).”

Projected 2010-11 U.S. ending stocks for corn were also down from the September estimate, from 1.12 billion bushels to 902 million this month, or 19 percent. Georgantones has “no doubt” about corn going to $6.

“We’re almost at the point now where ethanol and feed use is about the same,” he said, referring to Friday’s USDA estimate of corn use in 2010-11; feed use is projected at 5.4 billion bushels and ethanol, at 4.7 billion.

He noted the USDA dropped projected corn exports by 100 million bushels this month on tighter stocks (and likely resultant higher prices), and the potential of increased competition from Argentina, which is now planting.

Florida analyst Shawn Hackett of Hackett Financial Advisors, Inc. added the USDA report has come out early enough to allow South American farmers to increase their planted acreage if they wish, to meet world demand.

Hackett also speculates the EPA will hold off on a decision about increasing the blend wall for ethanol for now. If it announced an increase, EPA would run the risk of sending corn futures even higher, he explained; he believes it would just be logical to wait.
According to a recent Wichita Eagle article, however, the EPA told ethanol trade group Growth Energy that it expects to approve an increase of the blend limit to E15. This was quoted from Dave Vander Griend, a Growth Energy board member who reportedly said in Wichita, Kan., on Oct. 7 that the EPA will approve E15 for vehicles 2007 and newer this week and for 2001-06 models by the end of the year.

Soybeans and wheat up

Soybean futures also enjoyed a big boost from Friday’s USDA estimates, though it likely had less to do with lower projected yield and more with anticipated ending stocks. The USDA dropped expected harvest from its September report by 75 million bushels, or 2 percent.

The bigger drop came in estimated U.S. ending soybean stocks for 2010-11, from 350 million bushels last month to 265 million in October – a decrease of more than 24 percent. Hackett observed, “Everyone sort of knew (the USDA was) going to move the ending stocks down because of increased demand.”

Projected wheat stocks were also down from last month, from 902 million bushels to 853 million, a decrease of 5 percent. Wheat futures also surged last Friday; analysts for both CBOT and the Minneapolis Grain Exchange said this was “spillover” from the bullish outlook in corn futures.

Hackett agreed that right now, other grain markets are “tagging along” with corn, even though this summer’s news about the Russian and eastern European wheat harvest ruin is what he believes got people interested in the grains market once again.
“The world does not have a wheat problem,” he said, explaining farmers overproduced wheat last year. If U.S. growers plant the high number of acres expected and harvest well, he added, and if Russia has a normal season next year, “we’ll be buried” in wheat.

Market outlook

In one respect, Georgantones said the change from USDA’s September to October reports isn’t surprising – it’s the gap in the year where the biggest changes show up. But he’s still not sure why there were such wide discrepancies.

“Seriously, back in July I thought we were staring down a record crop,” he said.

Hackett referred to the quarterly USDA Grain Stocks report dated Sept. 30 and said he thought its data was designed to keep corn prices from going too high at that time. The revised data released last Friday, he said, has created a market frenzy – “They’ve gotten the market more fired up,” he explained.

“I sure hope (farmers) would learn the lesson from 2008 and don’t worry about ‘Is it going to be $6? $6.50? $6.75?’ … A farmer’s always got something to sell” if it goes even higher, he said, adding he would advise growers to sell a high percentage of their corn to lock in a high price now, rather than waiting to see just how high corn can go before it falls (since he also said he can’t imagine it exceeding $6).

Hog farmers, Georgantones said, will “get really hurt” by the increase in grain futures, just as they were getting hopeful about increasing numbers. Hackett said if grain futures stay up only a month or two before coming back down, he thinks livestock producers will expand. If they stay up 3-6 months, he said it will have a negative effect on livestock numbers.

Compared to stocks and grain futures in 2008, Hackett said the current picture isn’t that bad. Prices aren’t as high and soybean and wheat stocks aren’t as tight – and even with tight corn stocks, higher ethanol production means more distillers dried grains (DDGs) livestock producers can buy to mix with feed.

He does not think the commodities market will see 2008 prices this time. “All these numbers are guesses by the government,” he said, adding yield actuals could end up being higher than the Oct. 1 estimates.

As long as South America has a good growing season, he said world demand should be met – and if it doesn’t, the world should know by February, when U.S. farmers generally make their planting decisions, to adjust accordingly.

“It could get really bad if we had a weather problem in South America or next year in the U.S. … if we had another Russia somewhere,” he said, adding Russia’s current weather trouble is rare.

It’s not just supply and demand that drives futures. Hackett estimates 30 percent of the grain commodities market is supported right now by long-position investment from outside agriculture, such as from speculative and index funds.

“We’re not growing (economically) in any fashion, but if you look at the stock market (Dow Jones Industrial Average) approaching 11,000, somebody out there has some optimism, somewhere,” Georgantones noted.

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