Fundamental Analysis for FeedGrains and Soybeans

By Dr. Robert WisnerIowa State University

•The process of analyzing supply anddemand, developing price forecasts

• Provides the “Big Picture”– Hard for Farmers to visualize national crops

• Shows what to watch

• Gives guide to market sensitivity

• Helps quantify new market impacts

• Provides a benchmark price for plans

• Guiding principle: Price influenced bysupply and demand

Role of Fundamental Analysis

Iowa

Minn.

Wisc.

Ill.

Mo.Kansas

Nebr.

S.Dakota

OhioInd

.

Mi.

The U.S. Corn/Soybean Belt

83% of U.S. corn & soybeans are grown outside Iowa

N. Dak..

Ky.

Mil. Bu. Change in 2002 Corn Production vs. 2001 11/12/02

+240

+255

-76 -90 -160-238-212

-101

-38

+30

-49

+45+34

+32

+6+17

+16

+17+1

-3

-24

-29

-16

-17

-16

-49-16

U.S. -504814 below 2001-02 utilization

-43

Basis Implications!

Grain Market Setting2002-03: U.S. corn supply down 7%, processing

up 211 mil. bu., exports down 139 m. b. foreign feed gr.prod’n down 504 mil. bu. U.S. Soybean supplies down 6%, S.

Am. +460 mil. bu. after +247 mil. Y/A U.S. soybean use to be cut 6% EU, Japan ban on meat meal feeding GMOs: still some concern 2002-crop: more corn acres needed?

Fundamental Analysis

•Key Concepts•How Freedom to Farm Has Changed

Fundamental Analysis•Analyzing Supply•Analyzing Export Demand•Analyzing Domestic Demand•Seasonality•Some Key Web Sites•Current Examples

FORECASTING PROCEDURE:FORECASTING PROCEDURE:GRAINGRAIN

•Price influenced by supply, demand,competing products

•Prices influenced by current, expectedfuture conditions

•Grain is a global Market

•Weather: a major supply factor

•Government policy

3/05/02 Closing prices 3/31/03

March 2.03May 02 2.10 2.37 July 02 2.17 2.37Sept. 02 2.23 2.38

Dec. 02 2.54July 03 2.66 2.39 2.51Dec. 03 2.46 2.49 2.42

2.31 2.40

The time dimension in prices

9/23/02 quotes in white

Land set-asidesbefore FTF

2.48

2.00

SOURCES OF SUPPLYSOURCES OF SUPPLYINFORMATIONINFORMATION

•USDA: Farmer surveys & aerial photos– for stocks & production

•Census reports (Exports, Mill stocks)

•Checks from processing & exports(wheat & soybeans)

(production + stocks + imports –utilization = ending stocks)

4.USDA Objective yield plots & surveys

OTHER SOURCES OF DATAOTHER SOURCES OF DATA

•Monthly USDA crop forecasts•Weekly crop & weather bulletin•Census exports & processing reports

•National Oilseed Processors Association•Private crop forecasts•USDA World S-D Reports•USDA Weekly Export Inspections•Weekly price support activity

Alternative Corn Price Forecasts

A. Price Flexibilities based on elasticity ofdemand: Corn: 1% change in supplybrings 2% change in price (all else constant)

B. Corn forecasting model: Stocks/use, exports/supply, weather variable, lastyear’s price, loan rate, wheat price

C. Price as a function of carryover/use ratio

Export Sales & Shipments 9/01-3/20/03 Vs. a Year Earlier

Corn -12%Japan+11%, Korea -83%,Taiwan

-6%, Mexico +11%, Canada +91%, Egypt -45%, other Asia & Ocn. -74%

Soybeans +2%SB Meal -17%SB Oil -2%

FORECASTING FEED USEFORECASTING FEED USEOF CORNOF CORN

Key Variables:•Grain-consuming animal numbers•Availability of substitutes

U.S. feed wheatGrain sorghumBarley

Corn qualityLivestock marketing weightsLivestock/crop price ratioTime trend (incl. New technologies)

Forecasting U.S. Corn Yields

Yield: The biggest uncertainty in the Supply-Demand equation

Corn Yield: 5% below trend for 2003 cuts potential production 500 mil. bu.

10% above trend in 2002 would add 1,015 mil. bu. to supply

Price implications: Large

FORECAST VS. ACTUAL U.S.CORN YIELD

80

90

100

110

120

130

140

150

1987 1989 1991 1993 1995 1997

BU

./A

CR

E

Forecast

Actual

Locations of Under-ConstructionEthanol Plants, Jan. 2002

Source: Renewable Fuels Assoc.

Ann. Mil. Bu. Corn Use

• Earlville, IA 5.8• Steamboat Rock, IA 5.8• Galva, IA 6.9• Coon Rapids, IA 15.4• Lakota, IA 17.3• Marcus, IA 15.4• Milbank, SD 15.4• Rosholt, SD 5.4

Annual Mil. Bu.

Corn Use

• Watertown, SD 15.4• Stanley, WI 5.8• Monroe, WI 15.4• Spring Green, WI whey• Plover, WI (seed crn)1.5• Plainview, NE 7.7• Lena, IL 15.4• Caro, MI 15.4

Total 164.0

Corn Price ForecastingMarch 31, 2003 for 2003-04: Meth. I, Normal U.S. yieldPrice Elasticity of Demand: -0.5

1% Change in Supply = 2% Change in Price

2003-04 Supply up 11% vs. 2002-03Adjustment for Demand Increase:

+100 Mil. Bu., or 8% net increase in supply

Forecast U.S. Season Avg. Price: $2.13/Bu.

Balance Sheet forecast: $2.10 (Adjustment for China uncertainty& historical stocks/use)

Forecasting Model Result Meth. II, normal

yields Coefficients:Exports/Supply 1.46Stocks/use -0.76 Weather variable 0/1Loan rate $1.98 Prev. Price 2.32Wheat Price 2.60Forecast 2003-04 U.S. avg. corn price $2.13. Freedom-to-farm adjust. = $0.03

2001-02

FORECASTS OF MONTHLYFORECASTS OF MONTHLYCROP PRICESCROP PRICES

• First concentrate on season averageprice, U.S.

• U.S. average typically above Iowa byrelative constant amount

• Season average price adjusted tomonthly via historical monthly pattern

Two distinct patterns: normalcrop and short crop

Monthly Average Iowa Corn Prices, 1979-

80 Through 1999-00 Marketing Years

1.50

1.70

1.90

2.10

2.30

2.50

2.70

SEPOCTNOVDECJANFEBMARAPRMAYJUNJULAUG

Soybean Price Forecasting 1% change in supply brings 2.5%

change in avg. price, all else constant 2003-04 U.S. supply up 4% or 113 mil.

bu. World demand growth: +430 mil. bu. Foreign production +480 mil. bu. Net chg. for U.S. supply: 113+480-400 =

163 mil. bu. or 6% increase

Price: 6x2.5=-15%, gives $4.60/Bu.

New GMO Developments

• On 7/3/02: EU Parliament (1st.Reading) tightens GMO labelingstandard to 0.5% (vs. current 1.0%tolerance)

• 7/1/02:Japan’s Ministry ofAgriculture, Forestry, and Fisheries(MAFF) plans compulsory testingof GMO livestock feeds, effective4/1/03. (Japan Agrinfo Newsletter, vol. 19. No. 11, July 2002

Typical dirt road in Brazil during the beginning of the dry season.Brazil Cerados

Soybean Costs, Delivered toPorts

Rondonópolis, Jefferson,

Brazil Iowa

Non land production costs $2.82 $3.10Transport to port 1.31 0.64Total non-land $4.13 $3.74

Land 0.51 2.80

Total cost to port $4.68 $6.54Non-Land cost to port 4.17 3.74

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