Head to Head: Supply Necessities

October 2, 2013 03:07 AM


Corn and soybeans have different domestic supply stories; meanwhile, there does not seem to be a global shortage of either. What will it take to assure adequate supplies of domestic soybeans? On the other hand, what needs to occur in order to build demand for expected burdensome U.S. corn supplies?

Prices Will Help Supply Self-sort

Dale Durcholz

Dale Durchholz     
Senior Market Analyst, AgriVisor, LLC

The shift in the price relationship between corn and soybeans will go a long way to resolving issues for both. The persistence
of high soybean prices will curtail demand while promoting expansion in South America.

Typically, when the price ratio between soybean meal and corn reaches more than 3:1, demand diminishes. Today, it’s 2.65:1.

High soybean prices and a relatively weak Brazilian real have kept Brazilian prices near historical highs. The net effect of high soybean prices and moderate corn prices is prompting an acreage shift to soybeans. Recent estimates suggest plantings could rise as much as 5%. In Argentina, prices coupled with government trade policies are expected to shift more acres to soybeans.

With average yields, those two countries, along with Paraguay and Uruguay, could produce more than 5.7 billion bushels. Brazil will likely plant early, meaning their supply will enter the world pipeline early and diminish export demand sooner than last year.

Corn’s low prices will accomplish two things—stimulate demand and discourage planting in South America. The combination could cause corn exports to be the strongest toward the end of the marketing year, potentially lifting corn prices.

Rapid Grain Growth Not Needed

Dan Basse

Dan Basse
President, AgResource Company

The world is back to needing just a 1.8% growth in grain production to satisfy rising caloric demand. The markets are where they were in the mid 2000s. We need weaker prices to stimulate new demand growth.

The U.S. will likely produce a 2013 corn crop near 14 billion bushels, which is being achieved with yields below trend. The 2013 soybean crop was curtailed by weather, and the total crop will be near last year’s drought-reduced harvest at 3.1 billion bushels.

The world will not endure a shortage. Demand rationing in the U.S. will not be accomplished by futures, but by basis and spreads. This is similar to the just-ended 2012/13 crop year. With normal weather, it will take lower prices and considerable time for the U.S. to return as a key grain exporter and compete with Ukraine and Brazil.

AgResource does not expect the world grain markets to bottom for another several years (with normal weather). And the U.S. soybean shortage this year will be temporary with world producers expanding their oilseed production in the growing cycles ahead.

The U.S. is becoming the residual supplier to world importers. Only low prices for a considerable amount of time can rebuild U.S. demand and start the next bull cycle.

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