The rally in grain prices over the last two years was fueled by many factors including production concerns around the world, global economic factors like inflation and the Black Sea war. So are the commodity markets in reset or is this just part of a larger commodity super cycle?
Grain prices hit some historical highs in 2022 and old crop stocks remain tight in the U.S. and globally. But the market is now transitioning to new crop with USDA estimating bigger supplies of soybeans, and especially corn. Bill Biedermann, Co-Founder of AgMarket.Net says, “If we have a really big corn crop this year, there’s no doubt our carryover could go from 1.3 billion to 2.3 billion. I mean, that’s possible. Prices are going to go lower.”
Chip Nellinger, Blue Reef Agri-Marketing agrees., “The funds I think have a mentality going back to this most recent USDA crop report that carryout is building. We’re going to hit 181.5-bushel national yield on corn and 52 on beans. We’re transitioning to El Nino and that means we’re going to have perfect weather. “
Currently old crop prices for corn and beans are still higher than new crop, but for how long?
Stephen Nicholson, Global Strategist – Grains & Oilseeds, Farm Input, says, “Breaking the inverse if you have it is likely not happen until late this summer. So last half, August first half September, particularly as the September contract goes off the board. But it could be you know, it’s potentially earlier if the crop continues to develop well.”
So that could mean some volatile prices yet this summer. Besides higher production, the other change moving into the 2023 crop season is the funds have moved out of commodities.
Bill Biedermann, Co-Founder AgMarket.Net, says, “Now, with fiscal policy that says we’re going to create an environment where we can deflate values, they are selling. So yes, I think that the funds are going to move into other investments. I think it’s going to going to take quite a story to attract them back into agriculture right now.”
So does the reset in grain prices mean the bull market is over? Some analysts say this is just part of the typical super cycle pattern.
Shawn Hackett, Hackett Financial Advisors, says, “If you study all major bull markets and commodities and agriculture, they typically follow a 12-year cycle from start to finish. You initially get a two year rally up, which we did from 2020 mid-year 2022, kind of mid-year, and then you typically have a year and a half, demand destruction, some supply improves.”
So he says the current commodity reset is just the first wave of a longer bull market.
Hackett: 5:38 We believe we’re nearing the end of a first reset in a super cycle, 12-year bull market and commodities. This is the time that everyone believes that last few years was a flash in the pan that it was that it was never, you know it’s not going to continue. It’s all over and it really isn’t that the problems that exist with supply and demand. That created the rally to begin with. Haven’t gone away. We haven’t put the investment into take care of it. And it’s going to resurface again as it always does. Now that prices have become much more economical for the world.”
However, it may not be the same type of reset we had in the past, mostly recently 2013. In part because of global export competition especially from Brazil which is aligning with China and has taken over as the top exporter of corn and soybeans.
Biedermann says, “We’ve gone from what 105, 110 million tons to 150 million tons crop. I mean, the numbers are staggering. The other thing too, aside from the massive increase in not just South American production, but their logistics in order to ship it out is the relationship that they have with China and other allies that we used to have strong relationships with.”
However, Nicholson says some of that export loss will be offset by stronger domestic demand with the growing population and the push to green fuels. He says, “As we look forward, we do expect that we will see importers exporters excuse me having less free stocks or less volume to move around. And that also gets back to the point is that we see domestic demand. When we look at our ten-year baseline being very strong in the U.S. to think about a strong livestock market in strong demand for livestock products. Also, you see particularly on the oilseed side, you see a strong demand for crushed, crushed soybeans.”
For soybeans, Nicholson estimates another 600 million bushels of crush capacity, which should keep prices supported long term. “We’re looking at soybeans and we look at a 75% probability on beans. You know, we’ve got you know, the kind of bottom end as you get out to the end of that this tenure baseline, you’re still above kind of around the low end is around $14 for the national average farmgate price.”
And corn will have to fight for acres which will keep prices higher than historical averages. Nicholson says, “Are we going back to $3 corn? No. Are we going back to low $4 corn in our minds no.” We do see those prices staying good for the farmers in this range that we established back in the mid 2000s. We’re not going to move out of that range. At this point. We just may not be we may not be trading at the top end of that range. We may be trading more in the middle of that range.”
Surprisingly he says wheat has been the leader with global stocks at tightest levels since 2007-08. “So you know you’re going back multiple year lows here and wheat stocks to use ratio has been coming down over a multi-year period to so look for a lot of volatility in wheat,” adds Nicholson. And so wheat may also have to compete for acres with price. “So that will pull wheat that will put acres away from soybeans and corn both, so you know corn and soybeans have to maintain a try to keep their acres as well. So again, the acreage fight if you have it will be will still remain in place.”
The one difference and concern is that input prices are much higher than commodity resets in the past which could eat into profits.
