Grains Have Gone Parabolic!
St. LOUIS (ResourceInvestor.com) -- Over the past month, corn, wheat and soybeans have gone parabolic, surpassing highs set more than a decade ago. But with gains of 31%, 21% and 17%, respectively for each since early September, some analysts are questioning whether the rally in grains is sustainable.
Darin Newson, senior commodities analyst at DTN, said it is likely the grains market has grown overheated on speculation.
“If we look at the structure of the market, we could see a pullback,” he said.
Corn closed today at $3.43 1/4 cents per bushel, up from $2.35 cents in early September. Soybeans finished at $6.51 1/2 per bushel, up from $5.40 cents in September. Wheat is now at $4.80 1/4 per bushel, up from $3.80 cents a little more than two months ago.
“What we’ve seen in the last two months is an investment-led rally,” said Newsom.
According to Department of Agriculture’s (USDA) most recent crop report, the nation's soybean crop is on track for its best year ever, and the corn crop is expected to be the second-best.
Soybeans
Nationwide, soybean production is forecast at 3.2 billion bushels, up from 3.19 billion bushels last month and 3.06 billion bushels last year, according to the USDA.
Newson said the “underlying fundamentals never got bullish,” for soybeans. He said investment money has poured out of corn and wheat and gone into cheaper soybean futures.
However, Newson said the long-term outlook for soybean is less bearish with more supply going to biodiesel.
According to the DOA Farm Service Agency, one bushel of soybeans yields approximately 1.4 gallons of biodiesel. Soybeans contain about 20% oil, so it takes almost 7.3 pounds of soybean oil to produce a gallon of biodiesel.
In 2005, 75 million gallons of biodiesel were produced using 547.5 million pounds of vegetable oil. This year, analysts estimate that production will double, with 150 million gallons produced utilizing 1.1 billion pounds of vegetable oil as more biodiesel plants come online.
At present, there are 53 biodiesel plants operating, with 38 more under construction and 22 additional plants being planned.
Newson reiterated that the long-term outlook for soybean may be bullish with more supply going to biodiesel, but “the short-term rally is not sustainable.”
Corn
Corn production is forecast at 10.75 billion bushels, up from 10.9 billion bushels last month and more than 11 billion bushels last year, according to the USDA.
Like soybeans, Newson said the short-term fundamentals do not support the price and the market could be due for a pull-back.
However, ethanol demand supports the bullish outlook for the longer term. Some sources say ethanol plants may use up to 2.5 billion bushels of the corn supply in the next twelve months, which is about 350 million more bushels than the USDA estimated in the November report.
To satisfy ethanol demand in the 2007/2008 crop year, the U.S. will need to produce about 13.3 billion bushels of corn. Keith Collins, chief economist of the USDA, said at the Advancing Renewable Energy Conference last month that approximately 10 million more acres of corn will be needed to meet growing demand for ethanol.
Newson agreed that the fundamentals for corn are “incredibly bullish” in the long term, but still bearish in the short term given the increased supply.
He said speculators might chose to take profits and move back into crude, which he sees as undervalued at just over $60/bbl.
“You can’t tie all commodities together anymore,” he said.
Wheat
Although still down 32 million metric tonnes from last year, the USDA raised global wheat production by two million metric tonnes in the November report.
According to the USDA, continued drought in Australia and an early frost in Brazil are reducing production in those countries, but good harvesting conditions in Russia and Ukraine contributed to increased production in those countries.
Therefore, Newson said the short-term fundamentals are bearish for wheat as well.
“Everyone in the world can grow wheat, so there is enough on hand right now,” he said.
Like the other grains, Newson remained bullish on wheat in the long term, but said we could see a pullback through the winter until the spring.
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