The steep drop in corn, soybean and wheat prices following USDA’s November World Agricultural Supply and Demand Estimates and Crop Production numbers is a sign of things to come in the winter months ahead, analysts say.
“The report kind of confirmed what we already suspected,” said Joe Vaclavik, president of Standard Grain in Chicago. “U.S. grain prices are not competitive on the world market, and U.S. row crop production exceeded expectations, so you’ve got really a double-edged sword here. We were having trouble with demand in a down market that’s posting some multi-month lows.”
December corn, January soybeans and December Kansas City wheat futures each posted new contract lows following the release of the report. USDA bumped their yield and productions estimates higher for corn while pegging soybean yield and production at record levels. USDA also lowered their demand projections for the 2015-2016 marketing year for corn but made a slight revision upward for soybeans.
The forecast for 2015-2016 U.S. ending stocks for corn now lies at 1.760 billion bushels, which is the highest in 10 years. Soybean ending stocks also jumped to 465 million bushels, which is the highest level in nine years. For wheat, USDA dropped their forecast on exports and raised ending stocks to 911 million bushels, which is the highest in six years.
Low prices typically would be expected to scare up new business, Vaclavik explained, but with the strengthening dollar, higher export demand appears unlikely. “We should be seeing some demand improvement, but we’re really not seeing it,” he says. “That’s the big problem. You’ve got an increase in production and a decrease in demand, and that’s really, really problematic.”
Market conditions could worsen further in the winter months if there are no global weather events to negatively affect crop production in regions like South America and boost prices, analysts say.
Political events like the presidential run-off election in Argentina could even further depress soybean values, warns Greg Hunt, trader and marketing consultant in Chicago.
In Argentina, the pro-business center-right candidate Mauricio Macri is currently leading in the polls. If he wins the run-off election on Nov. 22 and devalues the currency, Hunt argues that the value of Argentine soybeans, which are priced in dollars, could leap and prompt farmers to sell. Macri is also promising to lower taxes on corn and soybeans in the country.
Hunt stresses that after two years of Argentine farmers holding on to soybeans--which maintained value amidst rampant inflation in the country--these South American growers are figured to be sitting on more than 15 million metric tons of soybeans. “[Argentine farmers] have been waiting for this to happen,” he said. “Overnight, if you devalue, those beans become six dollars better. If you’re a farmer, what are you going to do?”
Importing nations like China, Hunt points out, are watching Argentina closely. If the market is indeed flooded with Argentine soybeans after the election, that could further weaken the U.S.’s export competitiveness and drag down soybean prices into 2016.
Farmers in the U.S., meanwhile, currently are holding out for better prices. But, Vaclavik said, the lack of farmer selling is only a mildly supportive factor to prices.
“The issue you’re going to run into here is farmers don’t want to sell, but we’ve got essentially weakening demand,” Vaclavik said. “I suppose the lack of farmer sales could help support some of these front month futures contracts. That’s certainly helping to support the spreads. But in the big picture, it’s not a friendly factor.”