If $10 per bushel corn and $20 per bushel soybeans seemed unfathomable a month ago, try $17 corn and $55 soybeans this month.
According to Terry Roggensack, founding principal of the Hightower Report, prices that high can’t be ruled out.
Roggensack was a commentator on the CME Group’s Aug. 9 conference call ahead of August’s World Agricultural Supply and Demand Estimates (WASDE). He looked at the price highs set in 1973, the last time the world corn and soybean supply situation was as tight as it is today, and extrapolated in constant dollars what prices would need to be today to ration demand.
His answer: $17.59 for corn and $55.09 for soybeans. And that doesn’t factor in inflation.
Balance sheets don’t work
The other commentator on the call, Dan Basse, president of AgResources, declined to provide a price ceiling for either corn or soybeans. "The cash market will tell us how high prices will go," says Basse. "I can’t figure out the balance sheet." The numbers don’t work, he adds.
The hottest July on record in the lower 48 states and one of the driest ever has destroyed much of the nation’s corn and soybean crops. Roggensack estimates that many fields will be zeroed out for insurance purposes. Some reports from irrigated cornfields, he says, are that yields are 20% below expectations.
Basse also thinks the final corn yield could be below or near 120 bushels. Slice 4 million harvested acres from USDA’s projections and corn production would drop to between 10 billion and 10.5 billion bushels, which means corn would need to go to $9.85 to nearly $11 to ration current demand.
"This leaves us with in a big, big problem: Who’s going to go without? Is it the livestock guy? Is it the exporter? Is it the ethanol producer? Our bet at the moment is that the livestock people will take the brunt," Basse says.
He also expects corn exports to drop to levels not seen since 1974. "We have balance sheets that are almost unsolvable," he adds.
Soybean fields, which were planted early along with cornfields this year, have also sustained irreparable damage. "There are a lot of reports of fields with no beans coming out of the pods," Roggensack says. To make matters worse, South America, where the 2011-12 soybean crop was 807 million bushels lower than the 2010-11 crop, is now running low on soybeans. "Soybeans could have a massive run higher," he adds.
UN takes note
The current supply-driven markets are not a U.S. issue alone. In the past year, the world’s projected supply of grains has dropped by 180 million metric tons. "This is shocking. This is getting people at the United Nations very concerned," says Basse. "The poor in the world are going to see tremendous pressure on their budgetary expenditure for calories. This has become a very scary situation, particularly for those in the world who are impoverished."
No longer is this a "what price can you buy the grain for" type of market, says Basse. It is now a "do you have the grain" type of market. "There will likely be a long tail on this drought that will carry into the winter," he adds. A late frost will be critical to maximize U.S. corn and soybeans production, soil moistures need to be replenished, the winter wheat crop needs to be good, and weather in South America and Australia also needs to be nearly perfect.
"Any kind of price weakness will result in a buying opportunity," Basse says. But that will be difficult for livestock producers to swallow when corn prices are already above $8 per bushel and soybeans are higher than $16.
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