Imbalances in supply and demand tend to result in price volatility. Over the last 43 years grain demand has risen steadily whereas supply has not always met demand in some years. The USDA expects record global demand for corn, wheat and soybeans this year. Grain supplies are heavily dependent on weather and already this year weather has caused the USDA to lower their expected production figures for corn.
Actual corn production will depend on the total number of acres planted and the health of the crop moving forward. The USDA has lowered planted acre expectations and is projecting the lowest corn yield per acre in 6 years. Expect price volatility to remain elevated as weather will continue to be a key driver in grain production this year.
It’s the Law
What happens when a steadily rising demand for a commodity meets an uncertain supply?
The theory of supply and demand reveals that when the two are in harmony a commodity will trade at the “equilibrium price”. Alternatively, imbalances between supply and demand tend to result in price volatility. This can be seen when reviewing the supply, demand and price history of corn, wheat and soybeans.
World demand for corn, wheat, and soybeans has been growing steadily since 1976. The blue bars on chart 1 below illustrate this point. Population growth and the expanding global middle class have been the primary drivers of demand over the past 43 years. This consistent growth has resulted in the USDA projecting record global demand for grains this year (crop year 2019-2020).
Supplies are inconsistent because crop production is largely dependent on the weather. There have been years where supply expectations do not meet demand expectations. This point is captured on chart 1 when the green line (supply) touches or dips into the blue bar (demand). In the past, droughts have been a catalyst for reduced production expectations. This year however, the US corn belt has suffered too much rain, delaying or preventing farmers from planting and giving rise to production and quality concerns. Looking at chart 1 you can see that once again the USDA is projecting that supplies may not keep pace with demand and therefore the green line is dipping into the blue bar.
Year to date spot corn prices have risen by nearly 18%. This has occurred as the expectations for production have been revised lower to account for the impacts of unfavorable (wet) early season weather. The rains and soil moisture have led to delays in planting this year. As of June 9th, only 83% of expected corn acres had been planted versus the 5 – year average of 99%. It is not yet known how many acres will be planted this crop year, and the USDA is projecting that the production (yield) per acre will be the lowest in 6 years. Note that on chart 2 that the price pattern for corn aligns with the data on chart 1. Corn prices have moved higher when the green line has dipped into the blue line (see 2007-2008, 2010-2011, 2011-2012). In fact, spot corn prices have more than doubled twice in the last 12 years from roughly $3.50 per bushel to over $7.00 per bushel.
Corn is King
Corn, wheat and soybeans have similar uses throughout the global economy. Animal feed is the primary global use for corn. Corn is also used to produce ethanol, which is corn’s second largest global use. Wheat and soybeans are also used in animal feed and biofuels. The fact that grains, in many cases, may be used interchangeably suggests that as the price of one moves higher, it may increase the demand for the others.
Continued supply concerns and the potential for higher corn prices may lead to increased expectations for the price of wheat and soybeans as well. In fact, in the June World Agricultural Supply and Demand Report (WASDE) the USDA lowered their expected corn production and increased their expected average price per bushel for wheat and soybeans by 8.5% and 1.8% respectively. We believe that prices will continue to be volatile as the growing season unfolds. To be certain, favorable weather, higher yields and other factors could have a negative impact on prices.
Imbalances in supply and demand tend to result in price volatility. Over the last 43 years demand for grains has risen steadily whereas supply has not always met demand in some years. The USDA expects record global demand for corn, wheat and soybeans this year. Grain supplies are heavily dependent on weather and already this year weather has caused the USDA to lower their expected production figures for corn.
Corn prices have risen in years where the green line dips into the blue bars on chart 1. Actual corn production will depend on the total number of acres planted and the health of the crop moving forward.
The USDA is projecting the lowest corn yield per acre in 6 years. Weather will continue to be a key driver. Grains have similar uses throughout the global economy and in some cases may be interchangeable. The price of one may therefore be expected to have an impact on the price of another.
 Spot refers to the nearest expiration and delivery month for futures contracts.
 Source Bloomberg Finance LP as of 06/13/2019
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