Waiting for South American harvest | Buyers may be waiting to purchase new crop to see if prices go down
Signs of declining demand will put downward pressure on crop prices this winter, most analysts say.
As a result, the chances of another rally are limited, even with declining wheat stocks and tiny stockpiles of corn and soybeans.
“There’s relatively little upside potential,” said Jim Beusekom of Market Place Commodities of Lethbridge.
“I’ll be surprised if we see much of a rally.”
However, some analysts, including Beusekom, think there’s a chance the market’s present relaxation over supplies could quickly evaporate if South America has problems with its crops or if declining demand proves to be a temporary phenomenon.
“When you get into bad economic times, it’s hard to get a lot of credit,” said Beusekom.
“It’s easier to use up existing stocks and contracts than go out and purchase new stocks.”
Beusekom said some of the disappearing demand could be the result of buyers deferring purchases because they can’t or don’t want to finance new business. If that’s the case, then they could drive the market higher if they come back in during the winter.
“That creates a more bullish picture later on,” he said.
“I think there’s a lot of that going on right now.”
Market observers are regularly reporting reductions in world de-mand for corn, with the declines generally attributed to high prices.
“Price rationing is definitely taking place, with major customers like Japan, South Korea (and others) all buying record quantities of feed wheat and down on their year-to-date commitments for U.S. corn,” said analyst Alan Brugler of Omaha, Nebraska, in a commentary.
Weakening demand for all major crops has been noted in recent weeks, although canola, soybeans and wheat have been less affected than corn.
The general dynamic of the autumn and winter market for North American crops is to see prices fall through the harvest period, stabilize in late autumn and then gradually rise over the winter as spring looms.
This crop year has seen a stunning change in the supply outlook.
The U.S. Midwest drought demolished the U.S. corn crop and lowered soybean and wheat production, but the impact of that supply shock was quickly factored into the market.
The crop is now mostly in the bin and being marketed, and there’s little that can change the supply situation.
Rich Nelson of Allendale said even reduced U.S. 2012 production estimates in the U.S. Department of Agriculture’s annual summary in January wouldn’t offset the price-depressing effect of weaker demand.
“Even if you do reduce supply on the January report, the demand declines that we are seeing already now will far overcome those,” said Nelson.
The real potential for a supply change to reverse the negative outlook for crop prices is South American production, which could be a big factor if anything challenges its ability to produce a large crop.
The markets are expecting Brazil and Argentina’s soybean crops to relieve the pressure on U.S. soybeans, and that assumption is contained in today’s forward prices.
“The end users are trying to bide their time,” said David Reimann of Cargill.
“South America is looking fairly benign. As long as that is the case, it allows the buyers to maybe hang back a bit because they do have that backstop.”
Markets could become twitchy if something threatens buyers’ ability to wait until March to buy the new South American harvest.
“I think you’d see concerns about supplies return to the front burner pretty quickly,” said Reimann.
“The truth is that we need a pretty good crop down in South America this year to buy some comfort on the supply side of the equation.”
Beausekom said farmers tend to become bullish in the winter but often don’t realize that the factors that make them bullish might already be part of present prices.
“You’ll see that year after year, the bullish enthusiasm doesn’t die out, but the price does,” said Beusekom.
Most of the demand declines that have occurred are probably not just deferred purchasing. Farmers have to assume there is little likelihood for a sudden big increase in demand that would spark a significant winter rally.
However, all eyes will again turn to the weather and soil moisture in the U.S. Midwest after the South American crop is harvested, and any continued threat of dryness could spark a spring rally.
“Next spring, that’s when things could go wild,” said Beusekom.
“If that drought carries on … into 2013, man are we going to have explosive markets.”