I doubt the recent rally in crop prices is the start of a sustained bullish market.
We’ve had several situations coincide to spark a rally — the crisis in Ukraine, dry weather in the southern U.S. Plains and the usual spring “buying of acres.”
However, barring a weather disaster in a major producing region, and we can never rule that out, I think the market will slump again.
South America is harvesting record soybean and corn crops.
A record soybean acreage will be seeded in the United States, and several analysts think the recent U.S. Department of Agriculture prospective planting report underestimated the eventual area seeded to soy and wheat.
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Soil moisture in the U.S. Midwest is good.
Canada will carry over a huge amount of grain into the new crop year and if farmers here produce just an average size crop this summer, the total amount of grain available will be similar to the amount in the current crop year.
Europe had a mild winter, and the crop is a few weeks ahead of normal development.
There is no major weather problem in China.
Despite the political issues, crop production in Russia and Kazakhstan is forecast to be average. Ukraine’s winter wheat came through the cold season fine, and grain exports have not been disrupted.
The International Grains Council sees global grain stocks rising at the end of 2014-15, due mostly to corn stocks rising to 171 million from 155 million.
Global wheat stocks are forecast to remain at 190 million tonnes and rice at 109 million tonnes, which is steady with the current crop year.
On that outlook, there is a good chance prices could weaken once the U.S. crop is in the ground.
There are risks to that assessment.
The dry conditions in the southern U.S. Plains could settle into drought that severely hurts wheat production.
However, no global weather system is raising the risk of a drought on the Plains. It is also dry in Ukraine and Eastern Europe.
Another potential disrupting factor is the chance that cold weather could linger in the U.S. Midwest and Canadian Prairies and delay seeding. It could cause a further shift toward short season soybeans from longer season corn.
Iowa and Illinois, the biggest corn states, normally begin seeding around the middle of April.
However, spring delays would likely be a temporary factor on prices, unless excessive rain increases the amount of unseeded crop land.
Another risk to my forecast is if the developing El Nino becomes severe, bringing drought to Australia, India and palm producers Indonesia and Malaysia. If that happens, it could be a game changer.
And then there is the situation in Ukraine.
If Russia becomes more aggressive against Ukraine, the Black Sea grain export system could be disrupted and stiffer economic sanctions could make it difficult for Russia to export.
Be aware, the risk of these potential developments is already reflected in grain prices. If worst case scenarios are fully realized, then there is upside potential.
But at this point, I think the potential for lower prices is greater.
Remember, the USDA’s annual price average projections for the new crop year are lower than the current year.
If you have not already done so, it is time to use this spring rally to consider locking in price protection for a portion of your crop before the demands of seeding take over.
