Is world demand for grain really in trouble?

Analyst gives 2013 outlook | Corn, wheat outlooks bearish while soybean will start 2013 hot but then fade

CHICAGO, Illinois — After one of his presentations many years ago, Darin Newsom was asked what impact the events of Dec. 21, 2012, would have on grain markets.

He had no idea what the questioner was talking about until he was reminded by a colleague that was the date the world would come to an end, according to the Mayan calendar.

“My response to her was, ‘it’s certainly going to hurt demand,’ ” said DTN’s senior market analyst.

Newsom said it’s interesting as Dec. 21 approaches to note that the burning question in the corn market is exactly that.

“Is demand really in trouble?”

Newsom answered that question and others during the 2013 market outlook he delivered at the DTN/The Progressive Farmer Ag Summit 2012 conference.

The Reader’s Digest version of his presentation is that the corn outlook is bearish, the soybean outlook is bullish at first and then bearish and the wheat outlook is bearish until the market gets a read on what shape the U.S. winter wheat crop is in when it breaks dormancy next spring.

A study of futures spreads shows the commercial side of the corn market is growing more comfortable with supplies, as are market speculators.

“There are signs that show we may actually be getting close to the end of this demand market that has created these higher prices,” Newsom said in his Dec. 12 presentation.

The March to May futures spread has been trending down, reflecting a bearish outlook for the crop.

“They just don’t need the corn. Why? Because we’re not exporting anything,” said Newsom.

Non-commercial money (speculators) has played a significant role in the corn market. It began to leave the market recently and there is a real possibility it won’t be back.

“This could be a bit worrisome in the fact that we may not have this side of the market to provide us support in 2013,” said Newsom.

Another concerning development is that global corn demand is projected to fall in 2012-13 for the first time in 19 years. It raises the question — is this a sign of the demand market coming to an end or simply a reflection of the fact that the U.S. doesn’t have corn to sell?

“I don’t know. To me this is a sign of concern,” he said.

“This could be one of the early warning flags that this demand market we have built up over the years could start to be going away.”

He believes corn will stay in a sideways-to-downward trend in the first quarter of 2013, with nearby futures dipping as low as $6.80 per bushel.

Corn could rally back above $7.50 in the second quarter as non-commercial buyers become interested in the commodity because of the market’s seasonal strength.

Newsom expects the rally could be extended to a season high of $7.75 in the beginning of the third quarter and then drop toward the end because of harvest pressure.

The December contract could be in the $5.75 to $6.15 range in the fourth quarter, which is well below today’s futures prices.

The key question in the soybean market is whether South America’s crop will bring an end to the bullish sentiment in that market.

Newsom thinks the answer is an unequivocal yes. He can’t help being bearish in the long term, but is still bullish in the short term. In fact, there could be a “fairly stout rally” in the first quarter of 2013.

The March futures contract still holds a premium over the May contract, which means commercial traders are concerned about finding enough beans to meet China’s needs in the first quarter.

Soybean exports are on pace to exceed the U.S. Department of Agriculture’s forecast.

Newsom believes soybeans could rally all the way back to $16.50 during the first quarter. The crop could test its 2012 highs of a $17.89 nearby futures price if the South American harvest is delayed.

However, his outlook takes a dramatic downturn in the second quarter as South America’s crop hits the market.

The Brazilian government is forecasting 82.6 million tonnes of soybean production, which is well above the USDA’s 81 million tonne forecast.

Newsom said Argentina’s farmers could switch out of corn and into soybeans because of wet seeding conditions.

Old crop soybean prices are expected to be sharply down in the third quarter because of a slowdown in demand, while new crop could set a possible seasonal high of $14.50 early in the quarter, closing the gap between old crop and new crop beans.

Soybean futures could be down around $13 per bu. by the fourth quarter, depending on weather developments.

The key question for wheat is whether drought in the U.S. southern Plains ever ends and does the market care?

The answer is that the market doesn’t care until the crop comes out of dormancy next spring.

In the meantime, investors are decreasing their long position and increasing their short position in wheat, reflecting a bearish outlook for the crop.

Wheat’s global stocks-to-use ratio is projected to fall to 26 percent in 2012-13, which is down from previous years but still well above corn and soybeans.

“There’s just not this supply and demand scare in the wheat market. We still have ample supply to meet demand so it struggles to find fresh buying,” said Newsom.

He expects wheat will head into a modest seasonal rally in the first quarter with nearby futures prices testing $8.60 by late February. The lack of export demand and harvests in Australia, India and Argentina could limit buying enthusiasm.

Normal seasonal harvest pressure in the U.S. could be minimal during the second quarter, but Newsom still thinks the new crop July contract will fall back near $8.

A reduced U.S. harvest and a slowdown in cash sales could spark a rally to near $9 during the third quarter.

However, Newsom expects Chicago wheat to come back down to $7.75 by the fourth quarter of 2013, which is only slightly below today’s levels.

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