The changeover—which began in 2012—was simply this: supply mattered more than demand. In 2007, demand was the rage and something those in the grain business were not used to dealing with as a pricing leader. Penciling in an above-trend-line yield on corn, soybeans, and wheat in 2007 left us with decreasing ending stock figures. Think about that for a second: The US grows essentially a record crop, and the stockpiles of those crops go down.
In 2013 the American producer finally caught up to the new demands placed on them by ethanol production, Chinese imports of US commodities, and a leveling out of the world's middle class. In other words, 2013 was a re-stocking year for grain commodities.
Wheat has been ‘interesting’, corn shows good prices
Wheat has been an interesting market this past year. Flour buyers for the most part were happy with the price retreat throughout 2013, and we have noticed that most buyers have some first and second quarter coverage in place. Wheat planting is essentially done and most indicate that the crop looked good as it headed into dormancy. The crop is currently rated at 62% in ‘good’ to ‘excellent’ condition.
The hard red winter wheat crop (HRW) is the mover and shaker of the group. Both China and Brazil have recently been importing our HRW wheat—essentially brand-new customers for the US. While the futures price hasn't dramatically moved higher because of this export business, it has created an unusual event of HRW wheat being priced higher than the spring wheat contract traded in Minneapolis.
The January USDA crop production report usually provides fireworks after its release for corn. There has been at least a 20-cent move during the January report day since 2007. Most experts are looking for a 1 bushel increase to the current corn yield, which may further depress prices if it comes to fruition. But alas, low prices are the cure for low prices. Corn exports have been improving weekly, and the monthly expectations on the USDA reports for exports have continually climbed. They are currently pegged at 1.45 billion bushels.
Expect any extra production found in January's USDA report to go more to the export number than the ending stock number. Also, ethanol margins are currently at $2.50 for every bushel of corn that is ground. Cheap corn for ethanol and a record-breaking DDGs (dried distillers grains) export pace are the main drivers for the record profit margin. End users are experiencing the best prices in three years, but they still must be tactical on purchases as they head into the New Year due to the carry in the markets.
Looking ahead: Corn acres down, price drops to come
The corn market will likely see decreased acres next year in the US in favor of more soybean acres, though that largely depends on the futures price of the two crops. A large crop out of South America, which is forecast to be a record, would likely depress bean prices and cause some producers to rethink early planting. For now, the bean price is closer to 2.5 times greater than corn, so there will likely be at least 3.5 million acres removed from corn production nationwide, with planted acres likely coming in between 91.5 and 92.0 million acres. Bean acres would potentially be in the 81.5 to 83. 3 million acre range—a record acreage number.
While we are not in the price-forecasting businesses, the scenarios we are planning for our customers for 2014 are as follows: If trend line yield is achieved, expect corn prices to move lower and be at $3.50 or lower by the fall, bean prices below $10.75, oil below 37 cents, and Chicago wheat below $5.50 and potentially closer to $4.75. Conversely, a supply shock would see corn over $6.25, beans over $13.00, oil over 44 cents, and wheat over $7.00. Supply will be the key metric next year and even with a supply shock we do not anticipate new record crop prices for 2014.
Prepare for the ‘what ifs’
While I truly have no idea if these forecasts will be accurate, the best policy is to plan for multiple price scenarios.
The bearishness in market sentiment we are currently experiencing are reminiscent of 2010. Prices had nowhere to go but down. Eight short weeks later, wheat prices had literally doubled to over $9per bushel. Corn and soybean markets quickly followed. Those who had done their homework and prepared for the most unlikely of scenarios were able to continue on and gain a competitive advantage.
As someone that has seen firsthand the true impact of preparing for multiple ‘what if’ scenarios, I encourage anyone with commodity price exposure to spend a bit more time on the math behind a decision.
Mike Hogan is a commercial analyst specializing in agricultural, energy, metal and currency markets at commodity markets consulting firm Stewart-Peterson Inc.