By TODD SCHMIT and BILL TOMEK
If your market-riding “saddle” has a seat belt, you’d better buckle up. Grain and oilseeds have potential for even more volatility and higher 2011 prices. That’s if production concerns abroad and tightening world stocks materialize.
A U.S. economy that’s showing signs of rebounding from the recession, more favorable exchange rates and higher energy and oil prices are improving demand prospects. That’s raising concerns about whether growing demands can be met without continued increases in commodity prices.
Key Points
• Corn, beans and wheat prices to continue well above even recent years.
• Volatile world economic conditions to have huge impact.
• Higher livestock and milk prices are necessary to sustain those markets.
• Wheat: Continued production and quality problems in key production areas abroad, combined with dryer soil conditions for winter wheat production on the Great Plains, provide ongoing support for wheat prices. Tightening world stocks plus strong U.S. export markets are expected to push farm prices well above 2009-10 levels. But they may be still moderated from those experienced in 2008-9.
Current futures markets’ prices imply strong concerns about the ability of future supplies to meet growing demands. Given current and expected supply and demand levels, December 2010 futures contracts show strong year-over-year gains trading at over $6.50 per bushel. Contracts one to two years out are trading in excess of $7.50.
In short, keep your eyes on growing conditions and wheat quality in major world wheat-producing areas for 2011. Further tightening in stocks could make this an even more volatile market in the months ahead.
• Corn: While still the third-largest production level on record, downward yield forecasts combined with already-tight world markets have reverberated into strong and abrupt price gains. The news is emphasizing the supply effect on price. But it’s more precise to say that expected supply is small, relative to expected demand over the forthcoming year and beyond.
Demand for corn is expected to be larger in 2010-11, with gains in all domestic use categories. Corn feed use is expected to remain strong, presumably reflecting price appreciation in other feed commodities.
Extended increases in feed commodity prices will reduce livestock margins if not compensated by output price enhancements. Should this occur, expect lower feed demand next year and an accompanying reduction in livestock output.
Higher energy and oil prices provide support for maintaining improved ethanol returns. While ethanol production growth is tempering, modest annual increases in the U.S. mandate for renewable fuels should continue providing a base of support.
Government policy support to increase the mandated blend rate to 15% ethanol will do the same. That said, continued corn price increases could have similar related-market effects for ethanol producers if energy and ethanol prices soften in 2011.
Assuming corn export shipments in 2010-11 remain near 2009-10 levels, carry-in stocks at the end of this marketing year will be less than half of the Aug. 31, 2010 level. Should production expectations decline further, prices could become even higher and more volatile.
One wild card is China. Not historically a significant U.S. corn buyer, it has already made purchases in the 2010-11 marketing year. With projected growth in China’s corn production to all-time highs, only time will tell if these purchases will continue to a significant degree.
Corn futures expectations are bullish for the nearby months. But one- and two-year-out prices suggest a softening in prices — still well above those experienced in the last few years.
Competition for acreage with soybeans and wheat will remain strong for 2011-12. Keep an eye on crop production forecasts for 2011 and on the implementation of increased blending (E15) of ethanol in gasoline.
• Soybeans: Given continued strong export markets, soybeans will be in short supply relative to 2010-11 demand. Domestic and export demands continue to support historically high U.S. soybean prices.
U.S. stocks are well below levels exhibited earlier in the decade. That sets the stage for continued strong volatility next year, if any appreciable tightening of world soybean supply and demand factors materialize.
Average farm prices are projected to be $1.86 per bushel above 2009-10. Like corn, soybeans are in a tenuously high price position.
Contracts for delivery in subsequent crop years are trading at lower prices than for current delivery. That implies the markets are expecting some improvement in supply relative to expected demand.
Strong demand from China continues to underpin this market. Traders are wary about possible interest rate hikes in China after news about credit tightening there to calm inflation fears.
But good news entered the markets recently after Ireland accepted economic assistance from the European Union. That gives the euro a boost and pressures the U.S. dollar.
Recent dry conditions in key Brazilian soybean production regions may delay their 2011 harvest. That would bring extra supply-side uncertainty to the markets.
Look for continued wide price swings over the next several months. Continued strong export demand and a weakening dollar could sustain high soybean prices going into the next marketing year. But with the risk of volatile world economic conditions, forecasting anything with confidence remains elusive.
Schmit and Tomek are ag economists at Cornell’s Charles H. Dyson School of Applied Economics and Management.
Feed prices to take bigger bites
The 2010 reprieve in high feed costs improved livestock returns. But given current commodity prices, increased feed costs are expected in 2011.
For farmers purchasing most of their feed inputs, tight and possibly negative margins may occur as we move into the year. As of November, USDA is expecting modest reductions in red meat production in 2011, and modest increases in poultry and milk production.
March corn and soybean meal futures prices, as of Nov. 17, suggest strong increases in year-over-year feed costs this spring. If output prices fail to respond proportionally, livestock and milk production may be curtailed as we get into spring and summer. That eventually would lead to higher product prices during the second half of 2011.
This article published in the January, 2011 edition of AMERICAN AGRICULTURIST.
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