The CommStock Report

Friday, August 31, 2012
David Kruse, President of CommStock Inc.

The drought of 1988 pretty much stopped at Highway 71 in western Iowa. Crops west of the highway survived. This year due to our heavy soil type and fortunate rains in May that filled subsoil moisture reserves locally, we are an island in the drought.

In the drought of 2012 crops here are on the low end of normal. I am feeling some survivor syndrome as I can go east, south, west and north and find much worse crop conditions than my own. The US corn crop fell 28 percent below trend line yield in 1988. That would be about 120 bpa against today's trend line yield which matches what the Pro-Farmer crop tour found. I think that the drought of 2012 was worse than the drought of 1988 and subsequent crop estimates will prove that. I think the drought of 2012 was more on the order of the 1934 and 1936 droughts where the corn yield fell 30 percent below trend. Lower test weights and acreage abandonment have not been fully factored into production estimates.

DuPont Pioneer says that there will be adequate seed supply to plant next year despite drought losses. It will give seed companies a chance to clean all the junk out of the warehouses. They will boost South American seed production but seed demand in South America will increase, taking more of that production too. They say that they will not raise seed prices because of the drought. The base price may not go up but I bet they eliminate some discounts. They were charging enough already that they had an adequate margin but demand will raise seed costs regardless of what they spin.

A Farm Future's farmer survey for 2013 planted acreage forecast corn planting would be down 3 million acres next year, 4 percent, at 93.06 million. Soybean acreage would increase to 78.05 million from 77.1 million this year. All winter wheat acreage would be up 3.1 percent. Rain in the plains should facilitate that. They did not survey for cotton, which should see acreage decline significantly again. I don't put much stock in the survey but it may be hard to get farmers to plant more than 96 million acres of corn again after seeing how poorly corn-on-corn performs in a drought.

If you don't have a specific need to grow corn every year and can rotate to another crop, by my experience, corn-on-corn should be avoided. Corn-on-corn can run out of gas in a drought year well before ground in a corn/soybean rotation will. I don't know all the reasons why but drought and corn-on-corn do not mix. Probably next year will be an El Nino year and corn-on-corn will perform fine but there is more risk. To plant 96 million acres of corn, farmers had to plant a fair amount of corn-on-corn.

I think that at the current corn/soybean price relationship farmers will plant at least as much corn in 2013 as they did this year taking acres from soybeans/cotton.

The ratio on new crop is only 2.05 to 1 soybeans versus corn. At that new crop corn/soybean price ratio it would favor corn. Acreage will not be such a factor next year as will whether the drought has ended. The first step toward that kind of confidence would be for subsoil moisture deficits to be alleviated with some general CornBelt-wide soaking rains. Hurricane Isaac could get things started in that regard.

End-users do not have extended forward coverage and most are in a state of disbelief that it could be this bad. They are unable to bring themselves to accept current prices for the year ahead so are doing nothing, which I think will prove to be a mistake. Demand will have been starved before the new 2013 crop is harvested. With some of the forced livestock liquidation that will occur it will take an extended period of lower corn prices to recover from the demand destruction. That means that just a trend line yield would produce over-plenty in 2013.

Given what appears to be the fact that end users will consume 2012 production long before the 2013 harvest, it would be nearly impossible for most end users to have a plan that will keep them operating until the 2013 harvest.

Farmers have to sell almost all of their soybeans early in the first few months after harvest so they have to be processed and exported before March 1, 2013, in order to meet world demand before South American supply is available. This has never been done before. So what are most end-users doing? ...sitting on their hands and hoping the price will come down, with the exception of the Chinese, of course. If someone runs out of soybeans it won't be them. They have never stopped buying and will get their needs covered, leaving the rationing to be done by others.

Contracts and physical control of supply are two different things. Commercials have committed to contracts that far exceed the physical supply that they control. I think that they may well not be able to deliver the goods.

I would expect at some point there would be real emotion put into the market as end users who don't want to quit using corn and soybeans become desperate to acquire physical supply.

David Kruse is president of CommStock Investments,Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet. CommStock Investments is a registered CTA, as well as an introducing brokerage.

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  • Thank you for sharing the COMMSTOCK report. I think it is very well done. Herb James Cleatrwater, Floridahljames

    -- Posted by hljames on Fri, Aug 31, 2012, at 11:37 AM
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