Grain prices have been volatile throughout 2011 due to wide changes in production and demand estimates, as well as macro issues including the European debt crisis. Corn prices reached near $8.00 per bushel, pre-harvest, on a poor yield outlook in the U.S.
Moving into 2012, we expect commodity prices to continue to be volatile and trade based on both agricultural and nonagricultural market factors. The primary data point that will drive grain prices in 2012 will be U.S. planted acres of corn. Analysts are expecting the largest global corn crop on record, including 94 million acres of corn in the U.S. in 2012. Many commodity prices will be heavily correlated to any deviation from the 94 million acres.
Long-term factors that will continue to weigh on grain prices in 2012 will be the growing demand for bio-fuels, emerging market demand, global yield trends, and the political outlook.
In the short-term, we will be closely tracking the weather outlook for South America in the upcoming few months. Currently, the La Niña weather pattern is expected to bring severe hot and dry weather to Argentina and Brazil throughout the growing season for corn and soybeans.
Corn has been recently trading between $5.50 to $6.50, but was as high as $7.50, due to tight supplies both domestically and globally that were not capable of meeting demand. The price of corn began to decrease as wheat became an alternative for feed usage and macro concerns prompted investors to sell off grain positions.
Corn has a more attractive profit margin compared to soybeans at over $1.50 per bushel for the 2012 season, according to Iowa State University. Many farmers have already forward sold portions of their 2012 crop at high prices, forcing the farmers to plant corn to fulfill said contracts.
Our bearish outlook is primarily driven by a global recession due to continued European concerns and economic slowdown in China. Large U.S. corn plantings, a bumper crop, increasing South American exports, and political pressure may increase ending stocks to over 1 billion bushels in 2012/13.
• Macro Issues – A global slowdown will result in demand destruction, especially in emerging markets. The long-term outlook for corn usage strongly takes into account the urban growth in China where 40% of every incremental dollar of income is spent on food. If the European debt crisis is not resolved, there will be a continued flight to safety and a stronger U.S. dollar.
• Planted Acres – The key estimate in 2012 is corn acreage in the U.S. of 94 million. If planted acres exceed this estimate, the corn markets will take on a bearish mood until crop condition reports regain the spotlight throughout the growing season. Approximately 1.6 million acres are coming out of the Conservation Reserve Program that will be eligible to be planted in 2012. The amount of potential corn acres will also increase due to the high amount of prevent planted acres in 2011 that will now be eligible for planting in 2012, which was 2.7 million acres higher than average according to NASS.
• Bumper Crop – The past two years have resulted in disappointing crops and there will be a reversion to the mean at some point in the future. In each of the past two years, U.S. corn yields have been unable to surpass the 165 plus bushels per acre that the USDA trend line forecasts. If U.S. corn yields are over 165 bushels per acre in 2012 and acreage is above 94 million acres, ending stocks could be well above 1 billion bushels.
• Global Production – 2012 is expected to be the largest global corn crop on record, due to increased acreage in Brazil, Argentina, and Ukraine. Favorable weather and a weak La Niña could result in large exports from South America.
• Federal Deficit – The U.S. government is searching for budget cuts and agriculture can expect to see a decrease in spending. The direct payments, which are paid per acre farmed, are likely to be lost during 2012. Federal crop insurance premiums are roughly 50% subsidized by the government and these subsidies are also at risk under budget cuts. Farmer income would decrease significantly if crop insurance was to be covered entirely by farmers.
• Ethanol – The expiration of the blender’s tax credit will not decrease ethanol production, but will decrease refiner’s margins. Economic issues may constrain energy consumption and consumers may reject the use of 15% ethanol blended gasoline.
Our bullish scenario does not expect prices to reach record levels, but rather that corn supplies remain tight and global economic issues are somewhat resolved or contained. Although there are economic incentives to corn, 94 million planted acres will be hard to achieve. Difficult growing conditions in South America will keep global supplies tight.
• Reduced Acres – Corn planted acres could be below 94 million acres, which is probably likely, as there is probably not enough corn seed for 94 million plus acres. Dry soil conditions in the Corn Belt and flooding in Missouri River Valley will likely result in another difficult planting season this spring.
• Yields – A return to 160 plus bushel per acre is unlikely and a yield estimate of 154 to 155 bushels per acre is more likely, based on historical trends. Marginal land brought into production will also have below average yields. The weather is the single most important factor for producing corn and we expect there will be some bumps in the road.
• La Niña – Hot and dry weather patterns from La Niña are already pressuring South America and are likely to constrain yields and reduce South American exports. Corn prices will closely track the South American crop in the first half of 2012 and will have consequences on global supplies. Any significant yield decrease in other crops used for feed would also be bullish news for the corn markets.
• Ethanol Demand – We expect corn used for ethanol to remain above 5 billion bushels as refiners continue to operate with positive margins despite the loss of the blender’s tax credit. Political support of an increase in E15 infrastructure would strengthen the long-term outlook on bio-fuel demand and help support corn prices even in the short-term.
• Chinese Imports – China continues to be structurally short of corn and will rely on the import market to make up the deficit. China will have to restock government supplies at some point and will use the current low prices as a buying opportunity.
• Economic Stabilization – Global economic growth could pick up if the European debt crisis is resolved and growth stabilizes in emerging markets. A weaker U.S. dollar will make U.S. exports more competitive and could reach record levels in 2012.
Soybeans have been recently trading between $11.00 to $12.00 as strong competition from Brazil has decreased U.S. export demand. Prices will closely track the La Niña weather pattern in South America throughout the next few months as critical growth stages are occurring for the 2012 soybean crop.
A bearish outlook for soybeans would stem from a global recession or a bumper crop from outside of the U.S. Demand for feed usage would decrease in less favorable economic conditions on a global scale due to the slowed increase of food demand by emerging and emerged markets.
• Yields – High yields from Brazil and Argentina would increase global supplies to a level where global demand would not be able to keep pace and thus dampen soybean prices. The current La Niña weather pattern does not favor a scenario of record yields in South America.
• Price Correlation – Soybean prices will remain correlated to long-term corn prices and thus if a bearish corn outlook occurs, expect soybeans to follow due to the feed usage connection and crop rotation needs of the U.S. farmer.
As soon as USDA releases the early estimates of planned planted corn acres on March 1, we expect soybean prices to react. Any acreage larger than 94 million acres for corn will favor soybean prices as additional corn acres will come at the expense of soybean acres.
• Yields – Low yield estimates in the U.S. would be very bullish for soybeans, especially if paired with low acres and a poor South American crop. Domestic weather can be very volatile and can leave room for a large amount of risk in soybeans. Farmers will be allotting more acres to corn in 2012, thus taking not just average soybean acres out of production, but soybean acres that yield 1.5 times the national average. A low amount of soybean acres in Iowa and Illinois will be bullish for soybean prices.
Stagnant Yields – The USDA soybean trend line yield curve is increasing at a slow rate for soybeans. While working with farmers on a daily basis across the entire Midwest, soybean yields have remained quite stagnant for the past few years.
• La Niña - La Niña is currently the largest factor driving soybeans. The weather in South America is already extremely hot and dry which is putting stress on crops. Current subsurface soil moisture levels are already very low in South America due to the severe La Niña of 2010/11, thus any additional shortfall of rain will increasingly damage crop conditions, especially for the typically hearty South America soybeans.
Wheat has been recently trading near $6.50 per bushel after reaching $9.50 per bushel due to the Russian drought of 2010. Since the FSU has been cleared for open market wheat exporting, global wheat supplies have loosened, partially offset by the alternative to corn as a feed. The 2011 growing season is expected to be the second largest wheat crop on record.
The recent dissolution of the Canadian Wheat Board will now allow farmers to sell at market rates instead of government controlled pricing.
Our bearish outlook is driven by abundant global supplies, driven by improving crop conditions and increased exports. Weak corn prices will also weight on wheat.
• Price Correlation – Wheat prices will track corn and soybean fundamentals. Weak corn prices will no longer make wheat an attractive alternative for feed use.
• Global Production – Global production is the largest risk for wheat prices in 2012. Currently, the U.S. is at a very high level of stocks-to-use for wheat at 38, which is well off the lows of 20% in 2007.
• Yields – Improving growing conditions and the end of the southwest drought could result in a bumper crop of wheat in the U.S. The U.S. is preparing for a bright outlook on the 2012 wheat crop as adequate snow fall is covering winter wheat varieties and residual fertilizer could push 2012 yields higher in the southern plains after the poor yielding 2011 season.
The upside for wheat is minimal in 2012, but the potential for disappointing yields and a weaker dollar could push wheat prices higher.
• Yields - Decreased global yields could occur if drastic drought or flooding were to strike again in the FSU, Australia, Canada, Europe, or the U.S which could constrain the global export market for wheat.
• U.S. Currency – A weak dollar in the U.S. would be bullish for wheat prices and allow the U.S. to gain market share in the export market.
• Corn Fundamentals – Improving fundamentals in the corn market will support the grain market and force demand rationing.
2012 Overall Outlook
We expect 2012 to be a volatile year as prices adjust to planting estimates and weather patterns. We will also be keeping a close eye on the world politics. Presidential candidates could play a role in the grain markets during 2012 as well. Any sort of major political change to trade restrictions could also be a major factor for grain prices. In the 1980s, an embargo by Russia on U.S. trade lead to the crash of the U.S. grain markets as well as the entire agriculture sector.
Fundamentally, the long-term outlook for agriculture continues to remain positive. Growing food demand in emerging markets and increased bio-fuel production will continue to provide a long-term bull market for grains over the next decade.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.