Analysts are finding it hard to be bearish about crop markets, even if today’s bullishness is ringing alarms.
“It’s easy to get caught up (by headlines),” noted Chuck Penner, market analyst with LeftField Commodity Research, at the Manitoba Special Crops Symposium.
Penner noted that the price optimism worries him, because that often precedes a market reversal, but there are no obvious signals yet that market fundamentals are changing.
“Can anything stop corn use,” wondered Penner, quoting a recent headline.
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“The USDA report this morning said, ‘not yet, anyway.’ ”
The U.S. Department of Agriculture report Feb. 9 predicted that year end corn stocks, already at alarmingly low levels, would fall further based on increased ethanol production.
Economist Scott Irwin of the University of Illinois said in an interview that the sharp market reaction to the USDA report revealed the incredible tightness of corn stocks.
“We are in the part of the pricing curve that, in ‘economist-speak,’ is highly non-linear,” said Irwin.
“Small changes in (already low) stocks can have very large price impacts.”
Irwin said today’s bull market rally, following so soon after the 2007-08 rally, seems similar to the early-mid 1970s series of rallies. But a crucial element, he thinks, will be different: the rally’s longevity.
“I think the true spike or boom phase will probably last longer in this episode because of the biofuels mandates and high fuel prices working together,” said Irwin.
“As long as our current biofuels policies remain in place and crude oil stays above $70 or $80 per barrel, then I expect the current boom to last somewhat longer than the mid-1970s boom.”
That boom lasted from mid-1972 until late-1975, or less than four years. Irwin noted the present rally, which started in 2007, has lasted about the same amount of time.
He thinks U.S. government policies mandating ethanol use are a regulatory constraint to demand rationing that didn’t exist before.
Many analysts believe corn prices have to rise compared to soybeans to encourage more production. But Penner said new crop cash prices slightly favour soybean production.
If that doesn’t change by spring, U.S. corn production won’t rise.
“I don’t necessarily see a whole bunch of acres getting swung into corn,” said Penner.
“There’s virtually no difference (in per-acre net returns to farmers).”
Irwin said the wheat rally is based on production problems, but corn, upon which most crop prices are based, has suffered no major growing problem in the world for years.
The 2010 U.S. corn crop simply failed to maintain trend line yield increases.
“2010 was not a bad weather year. What happens if you get a bad weather year?” said Irwin.
Still, both Irwin and Penner see several factors that could break the rally.
Penner said some of the wheat rally is due to “hoarding” by overseas governments, but “what happens when all their warehouses are full?”
And Irwin noted that a big 2011 U.S. corn crop could relax the tight stocks situation.
Easing of the ethanol mandate would also change the situation, since ethanol consumes about 40 percent of the U.S. crop, he said.
But that is unlikely, given the all-important Iowa presidential nominating caucuses less than two years away.
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