5 Bullish Forces to Remember in a Bearish Harvest Market

August 11, 2016 12:00 PM
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With many expecting another bumper harvest for corn and soybeans, farmers are feeling the squeeze of a bearish outlook. Corn is hovering around its 2014 low of $3.18, and those low prices are putting pressure on soybeans, which were in the $9.80s for November contracts as of midday Thursday.

But low prices cure low prices, and Societe Generale analyst Rajesh Singla sees cause for optimism in the months ahead, once harvest pressure on prices has ended. “The market appears to have been ignoring the potential for increased export demand for U.S. grains and oilseeds,” he writes. “We expect a bullish demand-driven market for U.S. grains and oilseeds between September 2016 and March 2017, which should facilitate a recovery in prices.”

  1. Corn prices may finally be bottoming out. While the weather premium that many U.S. growers expected this summer has vanished, analysts at Societe Generale say they see “limited downside risk in corn price from current levels of $3.3/bu. due to four key reasons,” which include strong exports, existing market psychology that’s already priced in big crop, short covering by funds if prices decline, and yes, justifiably stubborn farmers unwilling to sell corn at a loss. “We believe U.S. farmers may refrain from selling corn at or below $3.20/bu.” 
  2. Brazil’s corn crop production problems have turned out to be far worse than realized, which will boost demand for U.S. corn. “Dry and warm weather in 2Q16 severely damaged Brazil’s winter corn crop, usually known as safrinha or second corn crop,” pushing down production by 20% to 68 million metric tons and reducing exports by 20%, according to the report.
  3. U.S. corn exports are on the rise. As a result of the shortfall in Brazilian corn production, countries will be turning to the U.S. for their corn needs. Singla expects U.S. corn exports to rise by 200 million bushels for the 15/16 marketing year and 300 million bushels for the 16/17 marketing year, to 2 billion bushels and 2.1 billion bushels respectively.
  4. Soybean prices, currently in the $9.80s for November contracts, will improve. “We expect soybean prices to average about $10.16 a bushel in 3Q16 and $10.4 a bushel in 4Q16,” Singla writes. “They should recover from current levels as fundamentals are likely to remain strong.”  Those fundamentals, of course, include China. “We believe strong Chinese import demand should continue to support prices,” he explains. “The recent weakness in soybean prices has been mainly driven by two factors: one) its relatively higher valuation versus corn triggered selling along with a fall in corn prices; and two) China, being the largest buyer, reduced imports when prices moved significantly higher and came back to market when prices fell into the value buy zone.”
  5. U.S. soybean farmers are likely to face less competition from South America in terms of acreage. “We see limited potential for soybean acreage growth in Brazil, the largest exporter of soybean(s), due to the severe recession and tight credit situation in the country,” Singla writes. “Corn farming has become more profitable than soybean farming in Argentina due to the removal of export duties on corn versus 30% duties on soybean(s).”

Just one caveat: While prices are expected to recover, producers shouldn’t plan on steeply climbing prices either. “We do not expect a runaway rally in prices, as the exports/demand-driven market is usually less exciting than the supply-driven market,” Singla cautioned.

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