CoBank economist: Grain market bearish, waiting on South American, Australian hauls

Daniel Kowalski, lead economist at CoBank, said that while he’s bearish on the global grain market as prices have come down on the heels of increased global supply, it all depends on South American and Australian harvest and their impact on the global trade.

While industry has been on focused on US wheat, the focus will now shift to the Southern Hemisphere—specifically Argentina and Australia, Kowalski told Milling & Grains. Regardless of what’s being forecasted, current inventories are still low by historical standards, and any major crop shortfalls in 2014/15 could reverse market conditions quickly, he said.

“The picture I painted is bearish, meaning we have a lot of supply and prices are overall on a down trend. ​On corn, if we don’t get production out of South America we are expecting, that could buoy prices. More support for exports out of the US could also support prices. It’s all about trade and all about South American production. If these things reverse, that could really have an impact.”​

Corn and wheat divergence​

Discussing the current grain harvest, he said the most notable shift has been the divergence of corn and wheat.

“The reality for corn is the starkest between last year and this year. Corn prices are down 41% from a year ago, while wheat is down only about 20%,” ​Kowalski said. 

“Leading up to the harvest season this past fall, corn and wheat were really trending together. That has changed as we have a lot more corn available that’s not really being sold.” ​And the driver behind that difference, he said, is production.

“Corn production is at record levels globally and domestically. But when it comes to the physical sales of corn from the time of harvest to January, you have to go back several years where this small of a volume of grain was sold into the market ​[only about 10% of the new crop sold as of late December, vs. 30% for the five-year average], which has been keeping prices down over the last couple years.”​

US wheat, on the other hand, charted less impressive production totals this year, dragged down by drought conditions—particularly in areas where hard winter wheat is grown. Overall 2013/14 US wheat yields were 12% lower than Canada, which posted a record year for wheat production, surpassing its prior year’s output by nearly 40%. But this came at the expense of easy rail access (canola, which also charted record production levels, uses the same rail lines). Some grain handlers north of the border are still struggling for rail access as a result.

As early numbers point to impressive hauls for Australia and Argentina, US prices will likely continue to soften in the coming months.

US wheat sales 'encouraging'​

“It’s partially expected, due to natural production cycles and geography, but it also has a lot to do with supply,”​ Kowalski said. “Competitors have a lot of wheat to sell. Still, US wheat exports were a lot stronger over the last month or two than analysts expected. People have been encouraged what’s been sold up to this point​.”

A growing economy should boost demand for agricultural products, power and energy, and communication services, according to CoBank’s recently released “Quarterly Rural Economic Review” for Q4. 

To download the CoBank report, click here​.