Don’t ignore potential for lower prices

Weather up in the air


I’ve never seen such a wide variation in forecasts for next crop prices.

It is due to several factors that are pushing prices in different directions:

  • Exceptionally tight corn and soybean stocks.
  • Outlooks for huge seeded acreage in South America and the United States for crops to be harvested in 2013.
  • Potentially big crops and strong competition from the Black Sea region.
  • Weather problems in Argentina and the U.S.

Here is how Chad Hart, agricultural economist at Iowa State University, summed it up.: “I can tell a good story on why corn prices next fall should be either $4 or $9.”

And because corn forms the foundation of grain and oilseed markets, its price direction has a big impact on the wheat, canola, barley and oats that Canadian farmers grow.

Don’t be lulled into thinking that 2012 prices are the new norm. A stronger demand base provides long-term support for grain prices, but the historically high prices seen in the last few months were based mostly on an exceptional series of crop production problems around the world that drove crop stocks down to perilously tight levels.

The adage is: high prices are the cure for high prices. Farmers will pursue those high prices by increasing seeded area and growing a larger crop that will eventually satisfy the market, allowing crop prices to fall.

So South American farmers started seeding this fall with the intention of producing a record large soybean crop and a large corn crop.

Analysts expect American farmers will seed a record corn crop next spring. Harvest could exceed a record 14 billion bushels if the crop enjoys normal weather and trend line yields, up from 10.7 billion this year.

Chris Hurt, agricultural economist with Purdue University said a crop that size would push year average prices to $5.50 per bu. from $7.60 in 2012, a drop of $2.10. It would far exceed the previous record for a one year decline of 73 cents in 1986.

However, these bearish scenarios of rapidly rising production are based on good weather that would produce trend line yields.

And the weather is uncertain.

Brazil’s soybean crop is mostly in good shape, but Argentina has had too much rain, which will definitely reduce the wheat crop that is being harvested. However, it is too soon to say how it will affect the recently seeded corn and soybean crops.

Perhaps seeding delays will shift land that was slated for corn into shorter season soybeans. Perhaps there will be a shift to normal precipitation for the rest of the growing season, and the excellent soil moisture will help generate record yields. Perhaps the excess rain will continue and harm crops.

So South America remains a wild card, although the recent weather stability in Brazil has reduced the risk.

The bigger uncertainty is U.S. weather. The U.S. Drought Monitor at www.drought.gov shows a devastating picture with the U.S. central Plains almost all in exceptional drought and the dryness extending into the Midwest.

Will rain return next spring?

There is a real possibility that the three year history of below trend corn yields will extend into a fourth year.

Hurt believes the risk of continuing drought could translate into new crop corn prices of $8.50 per bushel.

Other analysts have even wider spreads between the potential low and high corn prices.

This all means farmers face more uncertainty than usual as they consider their marketing plan for the 2013-14 crop.

However, it seems clear that the downside risk is much greater than the upside.

Grain prices can’t rise much higher than they are now, even if there are weather problems, but they can fall significantly if the weather returns to more normal patterns.

Farmers should discuss with their marketing advisers ways to lock in the strong prices now available for 2013.