The soybean market has fallen into a true weather market via drought weather conditions in Argentina vs. parts of Brazil. The last time such a similar condition existed was in 1977. However, I do not think the economy in the United States was in recession at that time. This year, traders at the Buenos Aires Cereals Exchange reduced 2008 to '09 planted area by 60,000 hectares because of drought conditions. Planting was estimated to be 92 percent complete for corn with drought expected to sharply reduce yield potential.
Bad weather conditions coupled with the lower use of fertilizer this year because of poor profitability and the inability to obtain financing should lead to poor yield potential. Argentina remains the world's No. 2 corn exporter after China stepped out of the export arena a year ago.
After USDA's final planting and supply and demand report Jan. 12, traders felt that with a 1.794 billion bushel carry-out in corn and increased production in Mexico, European Union, Russia and China, problems in Argentina and Brazil would not carry nearly the impact that it normally would. However, I tend to disagree. Recently, Informa estimated U.S. corn acreage at 82.7 million acres. Quite honestly, if we look at what USDA has corn targeted for in usage, we actually will need closer to 87 million acres or our carry-out most likely will plunge to extremely tight levels by 2010. Therefore, if Argentina's corn crop declines like the potential may be after a drop in their wheat production nearly in half of a year-ago levels, the export picture grows for U.S. corn. At 82.7 million acres, the weather has to be ideal and if La Nina lasts through February, the potential for ideal growing conditions become more suspect. Using trendline yields of 157 bushels per acre and a 91.5 percent harvested acreage of the planted acres, we would need 87 million acres planted just to hold the carry-out where it currently is projected.
Furthermore, wheat production around the world is in decline once more. Some would say supplies are larger. Perhaps, but much of the past growing season's wheat is of feed wheat quality, and supplies of food wheat are tight. Acres are down in the Ukraine, China and the U.S., and Argentine wheat production was nearly half of last year. Corn may find that it needs to fill the shoes of food in place of wheat exports.
VeraSun is set to auction off seven plants in the last half of March to help establish a new benchmark value for the plants. Cost of construction was upward to $2.25 to $2.50 per gallon during the last 24 months. These plants may well be auctioned off at 50 percent of cost value or less. VeraSun has received financing to be able to operate their remaining plants into late April. With getting the seven plants sold and being able to see those plants back into operation along with the rest, VeraSun should be helpful to stimulate the corn market for demand that we have lost for the past few month.
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March 1 stocks should grow again. This is pressuring the front end contracts while the December will be in an acreage fight with soybeans. For now, looking at the November soybeans and how they react with the March and May contracts is indicating that the trade thinks soybean acres will grow appreciably. So weather in Argentina may be a gift for the potential of exports improving on the old crop. While I do not anticipate new lows on the March contract, a typical February break should be in line this year.
