Farmers face a variety of open questions this year, the answers to which could send prices soaring sky high or diving to the depths, analysts say.
More than any year in memory, the outlook for the next 12 months is unpredictable.
“If we get a recovery in the weather, world stocks start to rebuild and U.S. stocks begin to rebuild, we could see corn futures (fall to) $4 per bushel,” said Arlan Suderman of Chicago-based Water Street Solutions.
“If the drought continues into the growing season, which is a legitimate threat at this point, we could easily revisit the highs of 2012.”
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China purchased just over 20 million tonnes of wheat, corn, barley and sorghum last year, that is well below the 60 million tonnes purchased in 2021-22.
Those highs were around $9 per bu. for corn, which is well above today’s range around $7 and far above the $6 level that was reached just before the U.S. Midwest drought sparked the massive 2012 grain market rally. Suderman’s range of $4 to $9 is huge, revealing the susceptibility of the market to many factors.
Analyst Darin Newsom of DTN is more bearish, seeing damage to demand from the 2012 price spike overwhelming even possible production problems such as a continuation of the Midwest drought. Newsom wonders if the cycle of high crop prices is ending.
“Are we beginning the end of the demand market that has supported not only corn but all agriculture since about 2005?” Newsom said.
“If we are, then even if we have a drought in the spring of 2013, I don’t think it makes any difference.”
Analysts appear to agree that it is impossible to predict U.S. production or world demand for 2013, following the severe drought and wild rally that ravaged production and hit buyers hard.
With neither supply nor demand easy to predict, the outlook is murky.
Analysts say the biggest questions for the market to answer are:
Some U.S. crops, such as corn and soybeans, are dominant in the world market, so U.S. production is a major factor in setting world prices. Midwest and central Plains soil is still extremely dry and the 2013 crop has poor prospects unless lots of moisture comes by seeding season.
Dry fall soil and almost no snow cover until recently have put the U.S. hard red winter wheat crop in unstable condition. If it recovers, the world will remain adequately supplied with wheat. If it has significant problems, wheat supply will continue to tighten.
Soybean futures still show a significant spread between the nearby contract and those from March onward, when the Brazilian and Argentine crops become available.
Predictions of a record large 83 million tonne Brazilian soybean crop are allowing markets to relax about future supplies, although stocks will still be tight through 2013 even if a large crop is harvested. Markets would likely react if something undermines the Brazilian crop.
Weather problems last year reduced Brazil’s crop to 66.5 million tonnes, down from the record 75.3 million the year before.
Argentina, the world’s third largest soybean producer, suffered a wet seeding season and there is a wide divergence in soy crop forecasts, from about 45 million to 55 million tonnes. Weather has recently improved and the crop that is seeded is generally in good to excellent condition.
Because of weather problems, production fell to 41 million tonnes last year. The record was set in 2009-10 at 54.5 million.
High prices hurt many crop buyers in 2012, and a spate of soybean sales made at high prices were cancelled last fall after the worst of the drought damage passed.
Many cancellations were made by Chinese buyers, convincing some analysts that Chinese demand is not as rock solid as many have believed.
More sales were cancelled early this month, making that concern greater. The true extent of damage to long-term demand won’t be-come clear until closer-to-average prices and stocks are available.
The never-ending increases in world demand for crops relies on the economies of advanced countries such as the United States and those of Europe limping along, as they have fitfully done since the 2008 financial crisis, and those of developing countries such as China, Brazil and India continuing to expand.
Anything that sets the world into recession would be bad for crop demand.
A big share of trade in agricultural futures markets is now owned by non-commercial investment money. Since the beginning of the long-term commodity bull market in the early 2000s, commodity investment funds have become popular as an asset class separate from the equity and bond markets.
This speculative market has at times led rallies and slumps, so it’s a major cause of volatility. Investment money has been leaving agricultural commodities since last summer, which can be seen as either a bullish or bearish factor. It’s bullish if the retreat is temporary and will reverse upon new positive news. It’s bearish if the money is permanently leaving the sector and won’t be there for future rallies.
Prairie crop market analysts are watching farmer behaviour closely this winter and into the spring to answer prairie-specific questions raised during 2012.
For example, will farmers retreat from canola after thousands had bad experiences in 2012?
Chuck Penner of LeftField Commodity Research wants to see if farmers attribute disappointing canola yields and returns to crop disease from tight rotations or from flowering season heat.
Farmers will probably cut acres this spring if disease gets the blame.
“But if farmers attribute it to the heat, then they may push canola acres again in the spring,” said Penner, who thinks canola still appears to offer better returns than wheat or durum this year.
Jim Beusekom, owner of Market Place Commodities in Lethbridge, said farmers benefited from holding onto crops through last winter and into the summer and might try the same thing this year.
“They’ve been very complacent sellers,” said Beusekom, who sees danger for farmers in holding onto crops in 2013 because he expects lower prices.
“They might hang on too long,” he said. “Last year’s success came from the U.S. drought. Those who try to copy that this year are playing Russian roulette.”
Newsom is looking for evidence over the course of the year about whether the long-term bull market, driven by growing demand, will continue. He’s doubtful it will.
“I think 2013 could be the capper to all this, the great final scene that we see in movies and books,” said Newsom.
“I think it really is setting up to be just that.”
