More short-term pain likely, but rising global ethanol production and weather problems in China and Indonesia could spark turnaround
Grain prices will continue to spiral downward for a few months, but a shift in market psychology could follow, says an analyst.
“I think there’s a major bottom (coming),” said David Hightower, founder of the Hightower Report.
However, there will be further carnage before the bottom arrives.
“We haven’t absorbed the (U.S.) crop that is coming in and we haven’t absorbed the crop that is still coming out from South America,” he said.
He believes December 2016 corn futures could fall another 20 cents per bushel.
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“We can get a lot below the cost of production in the coming months,” said Hightower.
However, he doesn’t think prices will stay at that level for long.
“There are companies that will make multi-year buys if corn is that low,” he said.
Hightower is convinced grain markets are about to bottom out because of bullish factors not yet picked up by the market.
“Biofuel demand is going to be bigger than what people realize,” he said.
The market understands the U.S. ethanol industry has hit the blend wall, in which blenders are using as much ethanol as allowed by the existing mandates.
“Maybe we can’t push anymore through the pumps, but we can certainly export it,” said Hightower.
Shipments have been rising, even to places such as the United Arab Emirates and Brazil.
“We’re exporting to an OPEC member and we’re exporting to someone who has the most efficient ethanol production capability of anybody,” he said.
Other initiatives in two major markets could also boost ethanol and corn demand.
India’s Supreme Court recently ordered New Delhi to develop a plan to clean up the air in the world’s most polluted city.
Meanwhile, local governments in China have asked the National Development Reform Commission to overturn a 2006 policy banning corn-based ethanol production. That could result in one million tonnes of new corn ethanol production.
Hightower also sees hope on the supply side of the corn situation. He believes South American corn production in 2015-16 could fall as much as 20 percent because growers are not enamored with weak prices.
As well, a couple of his sources in China tell him that Chinese corn production is way down this year because of drought during the growing season and rain at harvest.
“There may be as much as 21 million tonnes of corn production in China lost. That’s almost half what (U.S.) total corn exports are,” he said.
China likely won’t increase imports but its bloated stockpiles could shrink.
The U.S. Department of Agriculture has not yet incorporated that production loss into its Chinese supply and demand estimates.
On the oilseed front, he believes El Nino will take a toll on palm production in Indonesia and Malaysia. Twenty of Indonesia’s 34 provinces are in severe drought.
Palm production problems would have a ripple effect on soybean and canola oil because global consumption of palm oil is eight times that of soybean oil.
“If there is a little hiccup in palm production, it could completely eliminate the bean oil stocks,” said Hightower.
He believes those supply and demand factors, when combined, will be enough to change the market mindset and stop the downward price spiral.
