Will prices rise or fall? | Some analysts think depressed crop price sentiment, based on big crop outlook, is overblown
Grain and oilseed prices may not plummet as low as some people are forecasting, according to a major fertilizer company and a market analyst.
Michael Rahm, vice-president of market and strategic analysis with Mosaic Co., recalls last year at this time when analysts were predicting markets would need $10 per bushel corn to ration demand for a short crop.
But the market peaked at less than $8.50 and the U.S. Department of Agriculture now estimates the season average price for corn in 2012-13 was about $7 per bu., which is well below some optimistic projections last summer.
The USDA forecast for 2013-14 is $4.40 to $5.20 per bu. and some analysts, like Chris Gadd of Macquarie, think corn could fall well below $4.50 for a time in the immediate post harvest period.
But Rahm thinks the extremes are overblown.
“Our point is that prices didn’t increase to levels as high as people thought last year were needed to clear the market,” said Rahm.
“I think the converse holds true this year. I don’t think prices will drop as low as some people think simply because as they drop we’ll get an unleashing of pent-up demand.”
Global grain and oilseed use increases at a predictable rate unless there is a short crop.
Use increased by 2.4 percent a year for the five years preceding the 2012-13 crop year with little variance in that number. In 2012-13, it plummeted to 0.8 percent because of short crops in North America and elsewhere. U.S. corn exports in 2012-13 will be at their lowest level since 1971.
Rahm predicts grain and oilseed demand will rebound in 2013-14 as livestock producers rebuild their herds because of improved feeding economics. Biofuel production is also becoming more profitable because of cheap grain and $105 a barrel oil.
Mosaic forecasts a 3.5 to four percent increase in global grain and oilseed use in 2013-14, which is in line with what the USDA sees.
Arlan Suderman, senior market analyst with Water Street Advisory, came to the same conclusion as Rahm about where prices are heading, but he travelled a different route to get there.
For one thing, he doesn’t believe the U.S. soybean crop is going to be as large as the USDA and the market are forecasting.
“In fact, in my balance sheet I show U.S. soybean stocks for the 2013-14 marketing year just as tight as what they were over the past year,” said Suderman.
The market is expecting big crops, and until proven wrong will continue to do so. Funds will drive prices down until they find out the crop is smaller than anticipated, which could happen in late August or early September.
Suderman said there are nice looking soybean crops in the eastern Midwest, but there are significant production problems in parts of Iowa and Illinois that will drag down average yields. Crops in Minnesota, the Dakotas and Nebraska are also struggling because of late seeding and cool conditions.
“This is not a record yield crop, which is what USDA is calling for,” he said.
Suderman believes the USDA is also underestimating demand by 112 million bu. because it never seems to think China will buy as much as it does.
“USDA’s July new crop ending stocks estimate overstated ending stocks in 15 out of the last 18 years by an average of 103 million bu.,” he said.
“USDA is very consistently wrong on soybean stocks.”
A few months ago, analysts thought this would be a poor year for Chinese soybean imports because of bird flu and a rash of dead pigs found floating in rivers that indicated problems in the hog industry.
However, the country imported a record amount of soybeans in May and then broke that record in June.
China recently announced it would release 10 million tonnes of corn, soybean and rice from government owned reserves.
The market interpreted that as a sign that China will once again put the brakes on imports, but Suderman believes it’s an attempt to control domestic prices and that China will need to rebuild its reserves by importing more U.S. corn and soybeans.