USDA’s November World Agricultural Supply and Demand Estimates report made up for a two-month absence of "official" information, proving that the corn and soybean crops weren’t anywhere near what the negative pundits were publicizing. This created a false sense of price
bullishness. Demand destruction caused by high prices meant a 13-billion-bushel crop would have sufficed.
The January report will provide actual harvested data from producer surveys, eliminating the
modeling and discretionary inputs of previous estimates. In the past, the January report has held some 400-million-bushel surprises for corn and could be the final nail in the coffin for prices.
In short, soybeans are subject to South America’s crop potential and China’s appetite. Without a South American supply shock, the tightness of global stocks should ease by late spring. This means we’ll need to re-educate ourselves on how to deal with oversupply, something we have not experienced in the past seven years.
"It might not be how much money I make in the next few years, but how little I lose that counts."
If antidotal information is correct, farmers were woefully undersold going into the 2013 harvest. During the past 12 to 15 months, it’s not been easy to stay focused on the fact that this year could be much different than the past seven years.
In 2011 and 2012, production shortfalls curbed demand for U.S. feed and exports. This demand loss meant that even a below-trend yield of 155 bu. per acre would be too much.
The most misleading aspect of looking at the prior two years to guide one’s actions was the assumption that prices would rally into harvest. Since 2007, all one had to do was store and wait. I suspect that attitude is still prevalent.
The economics of supply and demand have not been repealed. High prices are a great fertilizer for global production. Anyone can grow $7 corn. In its November report, USDA increased global corn stocks by about 500 million bushels. USDA also upped exports 175 million bushels, as well as feed and residual usage by 100 million bushels, which helps offset the production increase. Economic models, export sales and livestock profitability suggest that this is a reasonable assumption.
According to USDA, we should recover nearly 2 billion bushels of lost demand during the 2013/14 marketing year. Global demand for feedstuffs did not fall significantly last year; however, end users found substitutes such as feed wheat, and new competitors stepped up to produce more.
Price Distortion. Farmers intent on holding their crop because of a lack of forward sales might distort price discovery in the short run. Also, they could actually delay needed economic pressure on our competitors to reduce acres, especially for corn. The market will be sensitive to the fulfillment of USDA’s expectation for demand recovery.
If the hoped-for price materializes for holders of bin-busting crops, it will not give the negative economic signal to our competitors to cut back. In fact, I suspect that $5 futures for 2014 corn production will have little effect on acreage reduction, barring an intervention by Mother Nature.
I am fully aware that weather is unpredictable, and requires flexibility in any price forecast. I also know that the ethanol hiatus is over, and I don’t see another multibillion bushel demand event
in the distance to help offset full production at near trend-line yields.
It might not be how much money I make in the next few years, but how little I lose that counts. The easy money is gone. My Honeyford Elevator friend in North Dakota is right—think profit, not price!
Jerry Gulke farms in Illinois and North Dakota and is president of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. For information, send an e-mail to email@example.com or call (707) 365-0601.
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- December 2013