Combine equal parts Chinese buying, South American crop problems and reduced U.S. crop prospects, then stand back and watch the bean market grind relentlessly to $15.
No, it’s not that easy. Soybean’s bullish fundamentals and bull market took time to develop. Not only did traders have a “prove-it” attitude toward China’s demand, South America’s production problems and lower U.S. planting intentions, the bean market first had to wrestle speculative money away from corn.
The “Corn Economy” didn’t give up control willingly. Many in the cash market still argue that corn is calling the shots in overall grain trends and claim the much stronger-than-normal post-harvest corn basis proves their case. These analysts have a long list of factors supporting corn basis: Expanded on-farm storage giving farmers greater ability to hold more of the crop off the market; stronger export demand than projected by the U.S. Department of Agriculture (USDA); stronger-than-projected U.S. feed and corn-for-ethanol use and (the market’s favorite) the corn was never there to begin with.
As is usually the case in the grain markets, no single factor is responsible for old-crop corn’s strong basis and futures’ stubborn ability to trade above $6. Since fall 2011, May 2012 corn futures (which represent 2011-crop supplies) closed under $6 just five times. Each time the May contract dipped below that level, end-users quickly extended coverage in the cash market and futures. That turned $6 into solid, long-term support for nearby delivery corn.
When May corn futures entered the delivery period, the first several days of the process saw the front-month contract climb to a big premium to not only new-crop futures, but the spot contract traded at more than a 30¢ premium to July futures. That’s a strong indication of tight supplies and strong demand. The market’s message to farmers: Deliver corn now!
That will tighten supplies of corn even further for the last quarter of the 2011-12 marketing year and likely result in chaotic market action.
Old-crop corn may have traded stubbornly above $6, but even that impressive price doesn’t compare to the new leader in the grain markets. Soybean futures rallied nearly $4 from a mid-December 2011 low to an April 2012 high just over $15. While soybeans marched higher, May corn and May Chicago wheat futures traded in an extremely choppy $1 range.
There’s really no need to ration old-crop (or new-crop) wheat use. Wheat is trading above normal levels, based on U.S. and global stocks-to-use ratios, only as a tag-along to soybean’s rally and corn’s ability to remain relatively high. Ever-tighter South American soybean supplies along with still-strong export demand for U.S. soybeans forced the bean market to grind higher in an attempt to “find the price” that slows global consumption. Corn futures took a different approach — trade high enough, long enough to eventually slow demand.
Corn yield holds the answer
New-crop corn yields will set the price trends for 2012-13. That’s obvious, but with huge planted corn acreage and still-strong demand, it’s especially true in 2012.
If 2012 growing conditions are excellent and we see a national average corn yield of 168 bu. per acre, there’s little doubt the national average cash corn price will drop below $5. But, if the rest of the growing season is poor and the national average yield is 150 bu. per acre (the past two crop’s national average yields), Pro Farmer expects a $6-plus national average cash corn price. And that’s an average — made up of lower and higher prices. The price high for new-crop corn futures under the “poor” scenario undoubtedly would clear the $7 level for at least a short period of time.
That’s because of a crop that’s already in the bin. A South American drought likely cut the 2011-12 Argentine corn crop to less than 20 million metric tons, compared to 2010-11 production of 23 million metric tons. In a good year, the Argentine corn crop is a touch bigger than South Dakota’s corn crop, and not quite as big as a good Indiana corn crop. Nonetheless, Argentina currently is the second-largest corn exporter in the world. And in a world hungry for feed grains, the market pays very close attention to production in the South American exporting country.
Argentina’s short corn crop this year already has increased demand for old-crop U.S. corn, but it has a residual effect as well. Argentine corn exporters have made a living “filling the supply gaps” from the U.S., which means some of Argentina’s old-crop corn slips into the U.S. new-crop marketing year. That’s why a short crop in Argentina will help support bigger new-crop U.S. corn exports.
And to get a clear picture of the year ahead, we also must take one more look back to the 2011-12 marketing year. Old-crop carryover really represents the supply-side cushion for the year ahead. USDA’s current estimate of 801 million bu. (and Pro Farmer’s estimate of 706 million bu.) are probably too low. Yes... too low. Admittedly, the outlook gets “cloudy” at this point.
If no more bushels were added to the 2011-12 U.S. feed supply from this point forward, Pro Farmer would expect even higher old-crop corn prices just to slow use enough to keep 700 million to 800 million bu. of corn “in the bin” at the end of the 2011-12 marketing year. In reality, a lot of bushels will be “added” to the old-crop supply.
Soft red winter wheat harvest will be earlier than normal and yield potential looks to be very good. That will increase the amount of wheat used for feed in corn’s 2011-12 marketing year, displacing corn used for feed.
Also, early planting and emergence of the 2012 corn crop means there is a chance that about 900 million bu. of corn planted in 2012 could be harvested before Sept. 1. If that corn is used as feed or exported, it will offset use of 2011-crop corn. And if it isn’t used, it still will be included in the Sept. 1 corn stocks tally.
And Sept. 1 corn stocks are the official old-crop carryover. USDA’s National Ag Statistics Service (NASS) has proven the past two years that corn is corn... it does not matter in which year it was planted. That could inflate the 2011-12 corn carryover... which inflates 2012-13 beginning stocks... which makes the 2012 Supply & Demand balance sheets a complete mess (“Making sense of corn,” below).
Based on conditions in early May, Pro Farmer is leaning up from the average scenario to excellent. If the early growing season weather pattern that brought generally normal to above-normal temperatures and ended a would-be drought in the northern Corn Belt continues through mid-summer, yield expectations will rise and pressure on new-crop corn prices will build.
Outlook for soybeans
While USDA’s old-crop corn carryover estimate held at 801 million bu., soybean carryover drifted lower and was likely to slide even more into the end of the marketing year. So while corn is fearing a Sept. 1 surprise, soybean futures are trying to slow use to hold carryover around 240 million bushels. The further old-crop carryover slides this year, the smaller the supply-side cushion for the 2012-13 marketing year.
Until early May, it appeared the bean market finally had found the price that would slow the price advance. May soybean futures posted a downside key reversal the day they posted a contract high above $15, triggering a round of long liquidation. But South America’s drought tightened exportable supplies in Argentina and Brazil. And with the pace China was buying old- and new-crop beans in early May, exportable supplies from both South American countries were evaporating quickly.
In early May, it was estimated that 80% of the 2011-12 Brazilian soybean crop already had been sold to domestic crushers or committed to exports. That left only about 475 million bu. (13 million metric tons) of soybeans to meet export commitments and to supply domestic users until the 2013 harvest.
And, once again, because South American stocks normally “fill the gaps” in U.S. supplies for the globe’s importers, a short crop in South America increases the U.S. new-crop soybean export forecast.
It’s that expected big increase in U.S. exports in 2012-13 that has many market-watchers anticipating higher bean prices in the months ahead. Even under the excellent crop scenario, 2012-13 soybean carryover is expected to be steady this year. That, however, does not mean a steady national average cash soybean price. It will take a lower-than-this-year average price to encourage nearly 250 million more bushels of use than year-ago (“Beans on the run,” below).
But even an average growing season points to a sharp drop in carryover and an increase in prices. A poor growing season would force prices sharply higher just to keep total use about equal with the current marketing year.
Wheat will be a follower
Saying the supply and demand balance sheet for wheat has become irrelevant would be an overstatement, but just barely. Wheat price trends will be determined by action in corn in the year ahead (just as it was in the year behind). The bright spot for wheat is a dark cloud for corn — the feed and residual category. With most of the growing season for the winter wheat crop already in the rearview mirror and good odds of big yields already baked into prices, the market is down to watching the spring wheat crop for supply-side worries.
It’s a weather thing
The 2011 growing season was dominated by La Niña conditions. La Niña is an episode of cooler-than-normal Sea Surface Temperatures (SSTs) that reduces moisture in the atmosphere and lowers the chances for rain in the U.S. Corn Belt. The La Niña episode was over by April and some long-term models suggested El Niño would be in place by summer 2012.
El Niño is warmer-than-normal SSTs that increases moisture in the atmosphere and increases the chance for rains in the Corn Belt. With that in place, odds are increasing for trendline or above corn and soybean yields in 2012. That’s not a big negative for the soybean price outlook, but it could leave the U.S. swimming in more than a billion and a half bushels of corn at the end of the 2012-13 marketing year, with a price well under $5.
Chip Flory is the editor and publisher of the weekly Pro Farmer newsletter. Flory develops the market outlooks for Pro Farmer. Learn more at www.profarmer.com.