"The widespread concern about food price inflation leads to
questions about the potential for market intervention if crop
prices remain high or move higher," said Darrel Good. "Some
intervention occurred earlier as a number of countries adapted
policies to restrict exports or encourage imports in the face of
"U.S. export restrictions are highly unlikely,
but other policy measures could be considered in extreme
circumstances. There are two obvious measures that could have
The first, he noted, is additional Conservation Reserve
Program initiatives to increase the availability of forage or to
expand crop acreage for harvest in 2009. The second is a
restriction on biofuels production.
"Reducing or eliminating biofuels mandates has been proposed,
but mandates are not currently the driving force in biofuels
production," Good said. "Production has been motivated by
gasoline prices and blender tax credits."
Good's comments came as he reviewed the rapidly changing crop
markets. Last week, discussion began about the end to the higher
price trend in corn and soybean prices. Ironically, that
discussion was followed by a move to new contract highs in both
"A number of factors unfolding over the past two weeks
suggested that the increase in corn and soybean prices that
began last fall might be coming to an end," he explained. "The
USDA's announcement of haying and grazing provisions for a large
number of CRP acres suggested to some that there would be a
significant decline in feed grain demand in the last half of
"Declining crude oil prices and the general worldwide assault
on biofuels production also signaled a potential decline in corn
and vegetable oil demand. Suggestions that the U.S. government
might take steps to defend the value of the U.S. dollar were
viewed as potentially negative for export demand for U.S.
Additionally, the sharp decline in wheat prices that made
wheat competitive as a feed grain also pointed to a weakening
demand for U.S. corn. The announcement by the Commodity Futures
Trading Commission relative to the withdrawal of proposals to
increase speculative position limits and to expand hedge
exemptions was thought to signal a bursting of the speculative
bubble in crop prices, even though credible evidence of a
speculative bubble was lacking.
[to top of second column]
"What changed?" Good asked. "Two developments last week dramatically
altered the fundamental situation for corn and soybeans. One was the
reversal in crude oil prices. After declining by more than $10 per
barrel, crude oil prices rebounded to new highs on June 6. The
reversal followed from forecasts of continued upward pressure on
prices into the summer months. Sustained high crude oil and gasoline
prices would likely keep ethanol prices moving higher and support
"The second factor was the widespread heavy precipitation in
major corn- and soybean-producing areas. The ongoing wet weather
means further delays in the completion of planting. It now appears
likely that not all of the acres intended for corn and soybean
production will get planted or replanted."
At a minimum, significant acreage will be planted well beyond the
optimum window for obtaining maximum yields. Whether from smaller
planted acreage, smaller harvested acreage or reduced yields,
expectations about corn and soybean crop size are being scaled back.
With trend yields, the USDA has already forecast a sharp
reduction in U.S. corn inventories by the end of the 2008-09
marketing year and the continuation of very tight soybean
inventories. If production falls short of expectations, further
reductions in corn consumption and rationing of soybean consumption
would be required, Good said.
On Tuesday, the USDA will release updated projections of supply
and use for the current and upcoming marketing years. Those updates
may contain some revisions in the projected level of consumption
during the current marketing year.
"Soybean exports are progressing at a more rapid pace than
projected, while corn exports have slowed," Good said. "The most
interest, however, will be focused on any adjustments in the average
yield projections for 2008 and the implications for inventories at
the end of the 2008-09 marketing year."
Potential crop size may continue to dominate the movement in corn
and soybean prices over the next several weeks, he added.
"Ultimately, however, the strength of demand for these corps will
be most important, as demand will determine the level of price
needed to ration production," he said. "Consumption rates will be
closely monitored for signs of a slowdown in use."
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental