Farmers rake over crop options

Farmers rake over crop options

By Chris Flood

Published: March 28 2008 02:00 | Last updated: March 28 2008 02:00

US farmers have rarely been so spoiled for choice when it comes to choosing which crops to plant. Corn, wheat, soyabean, oats, rice, barley, hay, canola and sunflower prices are all at or near record levels.

Which crops farmers will plant this year should become clearer on Monday when the US Department of Agriculture publishes its Prospective Plantings report, based on a survey of 86,000 farm operators in the first two weeks of March.

The report will set the tone for trading in agricultural markets this year because it will provide an insight into the crops that have emerged as winners and losers in this year's battle for land.

The report comes at a time when agricultural commodities have won the lion's share of the vastly increased investor inflows that have entered commodity markets this year.

The question is how farmers' planting intentions will affect supply dynamics and prices at a time when global grain inventories have shrunk to multi-decade lows.

Last year, the push for ethanol production in the US led farmers to rush to corn with a postwar record of 93.6m acres planted in 2007-08, up almost a fifth on the previous year. Corn faces stronger competition from other crops this year.

"We anticipate the plantings report to show US farmers intend to increase wheat and soyabean acreage and to reduce acreage for corn and cotton," says Sudakshina Unnikrishnan, of Barclays Capital. This view, which is widely held in the market, reflects price performances.

Over the past year, increases in the benchmark wheat and soyabean contracts, at 132 per cent and 76 per cent respectively, have outperformed corn and cotton, up 47 per cent and 58 per cent respectively.

As well as considering price signals, farmers' planting decisions will depend on what yields they can achieve, input costs and a final uncertainty, weather. This means forecasting how the acreage battle will be resolved is difficult.

Record prices have created strong incentives for producers to increase croplands with some hay and pasture lands expected to return to active crop production and further acres being released from the government's Conservation Reserve Program.

"Total corn, soyabean and wheat acres increased 6.4m acres last year [and] we expect a further increase of 6.1m acres this year [inclusive of double crop plantings]," says Lewis Hagedorn of JPMorgan.

Soyabeans are expected to be the main beneficiary of newly available land and JPMorgan forecasts acreage to rise from 63.6m to 71.4m acres in 2008-09. This should help soyabean production rise 15 per cent to 2,975.8m bushels. Due to strong Asian demand, the increase in US production may not be enough to prevent global stocks declining further from what are critically low levels. Low inventories will leave the soyabean market vulnerable to supply shocks and further price volatility.

For corn, some farmers will be reluctant to plant the same crop for a third successive season, fearing soil exhaustion. Late winter weather and rainfall have prevented early plantings in some areas so trade estimates for this year's corn plantings vary from 85m to 90m acres. Any acreage cut could be partially offset by a successful growing season but a large fall in US and global corn stocks in 2008-09 appears certain.

Gavin Maguire, of Iowa Grain, says US corn stocks could shrink below 800m bushels by the end of 2008-09, the lowest level for 10 years. With the supply buffer eroding fast, weather would be critical for prices.

For wheat, Iowa Grain forecasts acreage to increase from 60.4m acres last year to 64m acres, in line with other industry players.

US wheat stocks have shrunk to a 30-year low but the outlook for prices is complicated by a likely rebound in global production, with the highest levels of plantings for a decade expected this year.