After an autumn of financial crisis and falling markets, are we in the same position as we were in December 2008?
Standard Chartered, a British bank that does most of its business in Asia and Africa, thinks so.
“Markets are nervous, supply is constrained, demand is not waning and costs remain high — this is an almost perfect setup for a sustained rally once confidence returns,” the bank wrote in a recent report.
The bank sees a commodity rally in 2009 that will be most vigorous in the April to June quarter.
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Base metals will be the biggest gainers, but the bank also sees improvements in agricultural prices.
Demand from China and other Asian countries is likely to pick up in the new year, it says, supporting prices.
While this is possible, and indeed we often see a late winter-early spring grain price rally to encourage seeding, there are many reasons to think that if we do get a rally, it will be similar to the anemic one of spring 2009 and not the robust rise of 2010-11.
There were weather problems this year but no huge production disasters, such as the Russian drought of 2010. All exporters have lots of grain available, particularly middle and low grade wheat.
Also negative for wheat prices this winter is the improving moisture situation in the winter wheat belt of the U.S. Plains.
The increased availability of feed wheat is helping keep a lid on corn prices. Corn is the only grain with a tight stocks-to-use ratio, but that could ease with good weather in the coming year.
Informa Economics, a closely watched U.S. agricultural analytical firm, said Dec. 16 that it expects next year’s U.S. corn area to be 94.389 million acres, a 2.7 percent increase over 2011 and the most since 1944.
University of Illinois agricultural economist Darrel Good had a slightly lower estimate of 94 million acres in a recent analysis. He said that would lead to a harvested acreage of 87 million acres with the usual abandonment. Yields bouncing back to a more normal 160 bushels an acre would produce a U.S. corn crop of 13.92 billion bu., 1.6 billion more than this year.
The Canadian Wheat Board, in the comments accompanying the latest Pool Return Outlook, said a crop that size means “facing the prospect of almost doubling ending stocks with all the negative implications to the price structure that infers.”
We need a weather threat or a significant improvement in the world economy to shake grain markets out of their funk.
There are signs that the U.S. economy is improving a little and unemployment is falling gradually. However, the regularly erupting European debt crisis keeps extinguishing any nascent optimism that might be developing.
Also, the U.S. government and Federal Reserve have much less ability to stimulate the economy this year than they did in 2010, and European governments are entirely focused on austerity rather than on boosting the economy.
The weather might hold more potential to shake things up.
La Nina appears to be stronger than predicted early this fall. It is playing true to form with dryness in Argentina and parts of Brazil. This could limit yields if it continues for several weeks.
Analysts had initially expected the two South American farm powerhouses would produce a soybean crop slightly larger than last year’s record 124 million tonnes and a much bigger corn crop, up 10 million tonnes to 90 million.
But now that is threatened.
The worry might be a flash in the pan if rain returns in January, but if it doesn’t, it would support oilseeds, including canola, and corn prices.
Another supporting element for oilseed prices is the expectation that U.S. farmers will trim soybean acreage this spring.
Informa pegged its U.S. soybean area outlook at 74.608 million acres, down from this year’s 75 million.
Weather experts are saying the potential for continued dry weather is greater for Argentina than for Brazil.
The La Nina is stronger than expected but still not as strong as last year, and I doubt it will hurt yields enough in a large enough area to cause the type of production disaster that triggers a major price rally.
I fear we will have to wait for either a drought in the Northern Hemisphere or a reviving world economy to power a sustained rally.
