How Should Grain Buyers React to USDA Crop Report?

Commodities prices have so far responded pretty much as expected to the USDA's Prospective Plantings report, issued March 31. Corn prices are up, soybeans are way down.

That's potentially bad news for meat processors such as Tyson Foods and companies such as Archer Daniels Midland that make corn-derived products such as ethanol and high fructose corn syrup. And it's good news for big users of soybeans such as Smithfield Foods, a pork processor. And Bunge, a major bean-miller.

At least, that's how the markets are seeing it today. But there's a big caveat: the USDA report is based on farmers' intentions, and "history reveals some significant differences between intentions and actual planted area," Darrel Good, an economist at the University of Illinois, told Cattle Network late last week.

Corn acreage will likely decline, as the report states. And many farmers will likely switch over to soybeans and wheat, thanks in part to rising input costs for corn-growing. But there are other forces at work that might dictate what farmers might actually do.

For instance, ethanol production is in a bit of a trough just now, but the ethanol-friendly energy bill passed by Congress this year will spur more planting of corn, predicted Pablo Zuanic, an analyst at JPMorgan Chase. And he noted, also in Cattle Network, that long-term futures contracts seem to be supporting corn prices enough to forestall any mad rush into other crops. Also, it should be noted that the report is based on a survey early last month. Market conditions have changed since then, and they will continue to change as the planting season progresses.

It's probably best to view Monday's report as something like a political poll: a snapshot of a moment in time, but not a solidly reliable predictor of future events.