Optimism too high in corn, soybeans

Grain markets are far too optimistic about South America’s pending corn and soybean crops, says a trader for a major grain firm.

According to Jason Charles, who runs the export trading division of Land O’ Lakes Inc., the second largest co-operative in the United States, that means prices for those trend-setting commodities will be on the rise and prices for those crops, particularly corn, drive prices for other crops.

The U.S. Department of Agriculture is counting on South America to produce 150 million tonnes of soybeans in 2012-13. Some crop analysts think it could be as high as 155 million tonnes.

Charles believes markets have made a huge miscalculation.

He can’t fathom why they are counting on 150 million tonnes of soybean production, which would be up from last year’s drought-reduced crop of 115 million tonnes. That’s a big leap of faith despite 11 million more acres going in the ground.

“We’ve set a really optimistic bar,” he said in a Nov. 28 presentation at the Agri-Trend 2012 Farm Forum Event.

“We need every day to be sunny. We need two inches of rain a week. We can’t have any infrastructure issues.”

It reminds him of the USDA’s overly optimistic summer forecast for a 166 bushel per acre average U.S. corn yield.

The latest estimate is for an average of 122 bu. per acre because of drought.

Charles said South American planting conditions have been less than ideal. It was exceptionally dry in northern Brazil and there was extensive flooding in northern Argentina, to the point where livestock were drowning.

“I don’t think we have the ability this year with how we’re starting to grow more than 140 million tonnes down there, and I think that’s optimistic, to be quite honest,” said Charles.

The USDA is counting on 28 million tonnes of corn production from Argentina, the world’s second largest exporter of the crop behind the United States. Charles thinks that number is also out of touch with reality because of the flooding.

“We can certainly take 20 to 30 percent off that,” he said. “The high side of corn production in Argentina will not be more than 22 million tonnes.”

Charles said the world is counting on record South American corn and soybean crops to replenish dwindling global supplies. Anything short of record production will be bullish for prices.

Agustin Bianchini, an agrologist from Argentina who was speaking at the same conference, agreed with Charles that it is foolish to be counting on record production at this early stage of the growing season.

“I don’t know about the exact numbers, but I agree on being more conservative. It is too early to forecast crop production,” he said.

Bianchini said corn yields are set in mid-December through January and soybeans from late-January through early-February. That’s when rainfall will be critical.

However, he agreed it’s pretty safe to assume that Argentina’s corn crop will be smaller than expected because of the rocky start. Some acres were lost to flooding and others won’t be nearly as productive because of nitrogen leaching in the saturated soil. Growers received 500 millimetres of rain over a two month period.

He said his price outlook is also bullish because the U.S. corn crop was harvested two weeks earlier than normal, starting in mid-August.

That early-harvested crop ended up in the USDA’s carryout estimate for the 2011-12 crop. It will be double-counted as both old crop and new crop.

He believes the USDA’s corn carryout number of 988 million bu. should be closer to 500 million bu., meaning the U.S. corn crop is even smaller than people think it is.

“Small crops don’t get bigger. Small crops get smaller. That’s bullish the farmgate, that’s bullish prices,” said Charles.

He believes March 2013 futures for corn will test $8.50 per bu. and soybeans should test $18.50. Strong corn and soybean prices will elevate most other grains and oilseeds.

“I am bullish commodities and I’m out there buying every day.”

He buys 20,000 to 30,000 tonnes of soybeans and 500,000 to 600,000 bu. of corn a day in advance of what he anticipates will be a run-up in prices.

Charles operates a farm in Saskatchewan and plans to be 30 to 40 percent sold on his anticipated 2013 production by the end of March because the highest prices typically happen during the battle for acres in February and March.

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