Q: How has your stance on the grain markets changed during the last few months?
A: The mentality of the market has really changed in the last four months. The ethanol story, which has driven the corn story so acutely in the last six years, is starting to wane dramatically. We don’t see any future growth in ethanol. In fact, USDA came out last week and suggested that through 2022, ethanol demand will be declining each year going forward. That’s a big change.
In the last 6 or 7 years, we have dramatically increased production of corn and other grains outside of the United States. High prices have encouraged places like Ukraine, Brazil and Argentina to really produce more corn and more soy. That expansion is ongoing as we speak. In fact, Brazil became the world’s largest corn exporter for the first time in history. The United States has seen its market position decline.
If we are to see higher prices, they have to occur to what we refer to as supply dislocation. Mother Nature. Too much heat or too much rain.
Our expectation is that prices will slide as the U.S. tries to buy back some of its competitive position in the world market. That’s somewhere probably under $4.50 for corn and under $10 for soybeans. Our advice has been, for the first time in probably 5 years, to price this year’s crop and even 2014’s crop. We’re concerned about a much more bearish landscape, as our demand drivers have lessened.
How many years would you feel comfortable forward pricing right now?
Right now we’re 60% sold on this year’s crop, we feel the other 40% is covered with revenue insurance policy. We have 50% of corn and soybeans priced for next year. This is the largest percentage priced we’ve had going back the last 15 years.
Q: How big of a production disaster would we need in terms of crop production to get back to last summer’s high prices?
A: We’d need a national corn yield of somewhere around 140 bu./acre to keep corn prices above $6 per bu. If we want to get above $7, we’d need a yield around 125 bu./acre, or like last year’s drought. The reason we couldn’t go above that is because there is so much rain in the world. Last year we had a Latin American drought, followed by a northern hemisphere drought. So we had droughts in both North and South America, which lead to the big markets last year. Historically, that’s very rare. This year our nemesis is not too little rain, it is too much. Although some farmers are having to deal with late planting and ponded out fields, the message is rain still makes grain. Ultimately we’re planting 97 million acres of corn, so we’re planting way too much corn to meet current demand.
Q: The funds have left the grain markets. Why has that happened and what will it take to bring them back?
A: All of our fund clients that left the grain markets aren’t coming back unless there is a dire drought. That dire drought would probably need to happen by the second week of July, which is looking unlikely. The big market has been in the equity and stock markets. That’s where the opportunity has been. They have left the grains because they don’t see a story there anymore. I just don’t have a story for the grain markets at the moment.
Have a question for Dan?
Contact him at email@example.com or 312-408-0045.