With the combines only recently out of the fields I’m sure many farmers are taking a welcome respite to kick back and consider the 2010 crop, which is in the rear-view mirror. For many farmers in Western Canada a repeat of the tough 2010 growing season in 2011 would not be welcome. In the East, it was a much better season. So, as we take a look at the outlook for corn, soybeans and wheat for the 2011 growing season, I’m sure there will be many cautionary tendencies. These markets are not for the faint of heart. A look ahead at these markets might as well start now.
When discussing the outlook for grain in 2011-12 its important to distinguish a continuing dichotomy within the grain markets compared to years gone passed. Increasingly, grain markets are becoming more volatile not necessarily because of the fundamentals of supply and demand but more so from outside influences. For instance the “outside markets” have a real impact on the upward and downward movement of agricultural commodities. This has been accentuated in recent years into more of a structural volatility as speculative limits at the Chicago markets have been increased putting much more risk exposure into grains.
In fact, speculative position limits by contract for corn and soybeans has almost quadrupled since 1999. They have increased by more than a third since December of 2005. In other words, within the trading pits at Chicago there is a lot more money chasing after corn, soybeans and wheat than there ever has been before. It has added greatly to the volatility within the grain market versus anything previous.
This is a structural volatility, put in place by the CME, which makes volatility thrive. This volatility could certainly be interpreted as good and bad, but it’s pretty obvious it has made the cash market nervous. With the increased volatility in the grain market especially when the market gets hot like it has been since June 2010, end-users sometimes pull out. At times and especially post-1999 and 2005, market volatility is too hot to handle in the cash market.
When watching the markets in the upcoming winter months it is always important to keep in mind the “non-commercial” positions within the market. In other words, increasingly the markets have become more speculative with people who are not hedging grain. For instance, some ETFs or exchange-traded funds are set up primarily to garner greater returns in the commodity markets versus some of the poorer returns in the equity markets over the last couple of years. These players in the grain markets will be very active in 2011-12. Depending on the performance of global equity markets, their impact on the grain markets may become even more pronounced.
A new wrinkle into any outlook on grain prices for 2011-12 has to do with QE2. The recent infusion by the U.S. Federal Reserve of over half a trillion dollars into the U.S. economy cannot be ignored. With the United States effectively debasing their currency such a move is a boon to grain prices almost like an artificial support under the market.
Corn markets tightened significantly in 2010-11, as total projected usage of 13.430 billion bushels is far greater than 2010-11 production projected in the November USDA crop report of 12.540 billion bushels. This has put U.S. corn stocks to use ratio at 6.2 per cent compared to 13.1 per cent last year. Ethanol production in the United States is now set at 4.8 billion bushels, which means almost four out 10 bushels produced in the United States will go to ethanol this year. This has put corn futures prices up over the $5/ bushel range with a spike over $6/ bushel earlier in November.
At this current rate of usage the United States will continue to decrease ending stocks and eventually not have enough corn to satisfy demand. Of course, the market will take care of this by either driving up the price high enough to ration demand, increase production or a balance of both. Having planted 88.2 million acres of corn in 2010 an acreage figure over 90 million acres in the United States in 2011 needs to be in the cards to help satisfy this demand. In fact, Informa Economics recently released their 2011 corn acreage projections pegging U.S. corn plantings for 2011 at 93.055 million acres.
Much will depend on the planting decisions of U.S. and Canadian farmers, as spring 2011, gets closer. Yes, corn needs more acres to meet its demand in 2011-12, but increased price levels for soybeans, wheat and cotton, as well as other grains, will surely have something to say about that. An acreage battle should take place this winter and spring to help decide where those acres go.
The big difference between the corn and soybean markets has to do with the two different world production areas. For the most part the United States is the world’s major corn-growing area. With soybeans, the market has two planting seasons and two harvest seasons, which adds more seasonal volatility into soybean prices. Brazil and Argentina now produce more soybeans than the United States.
Of course soybeans are an integral part of world oilseed markets along with canola. Typically the canola market is similar to the soybean market benefiting from the strong global demand for oilseeds. The profitability of crush margins and availability of supply sometimes decides which commodity gets crushed first.
U.S. soybean production in 2010-11 projected in the November USDA report will be 3.375 billion bushels, a surprise drop from their October report. Ending stocks are projected at 185 million bushels. With a stocks to use ratio of 5.5 per cent U.S. soybeans have benefited from China’s insatiable appetite for soybeans as exports are pro- jected to take 1.570 billion bushels of this crop. The soybean complex has benefited from this insatiable demand putting soybean prices in the $12 futures range, having briefly spiked over $13 earlier in November.
At the same time, Brazil is set to produce 67.5 million tonnes of soybeans and Argentina 52 million tonnes of soybeans (total approximately 4.4 billion bushels). South American soybean production always has the potential to increase, but much depends on the exchange rate with the U.S. dollar. The infrastructure is improving for logistics in Brazilian soybean country. Argentina has many competitive advantages in the world soybean market, especially their proximity to huge port facilities. The political situation in Argentina with regard to soybeans is always tenuous, as the government will often limit exports to the distaste of the domestic soybean sector. This can have a large effect on futures prices.
For both corn and soybeans it is hard not to be bullish for 2011-12 because of the healthy demand scenario. Of course much of this demand was jump-started in 2010 because of the problems in the wheat market. With Western Canada getting off on the wrong foot with spring 2010 plantings and Russia having the worst drought in a century, wheat helped take the commodity market higher in 2010. With Russia having an embargo on wheat exports into 2011 the uncertainty of the situation is bullish for prices. Still, the world’s wheat stocks to use ratio stands at 25.9 per cent, a relatively large number historically.
If I had to choose, it would be hard not to be bullish for corn and soybeans and wheat in 2011- 12. Sure, the fickle nature of the Canadian dollar will affect our cash markets. It’s one of a myriad of old and new factors affecting these markets. The challenge in 2011 will be to consider them all.
PhilipShawfarmsnearDresden,Ont.His agriculturaleconomic,farmmachineryand commoditycommentaryispublishedacross theUnitedStatesandCanada.Learnmoreat www.philipshaw.ca