From the November 01, 2012 issue of Futures Magazine • Subscribe!

Grains outlook: After the big drought

Jack Marshall, president and CEO of Paramount Capital Management, believes there will be a very large increase in planting of Southern Hemisphere and Eastern European acres as a result of the drought because of the extremely elevated price of grains. “To take advantage of it, they’re going to put as many new acres in as they can. Nothing cures high prices like high prices.” 

Government numbers also show that there is far more demand than supply for corn, Marshall notes. “So the market is going to have to ration whatever’s available and we’re going to have to ration via the ethanol and livestock markets. It looks to me like you’re going to have a pretty significant liquidation of cattle and poultry. We’ve already seen the beginning of it in hogs,” he says.

The prospect of droughts continuing into the next growing season — or not — is another issue that traders will need to assess. “Weather is still an issue over in your hard red winter wheat area,” Crow says. “It’s a growing issue. We keep getting promises of rain, but we’re not getting it and the question in my mind is, ‘Are we getting the seed bed we really want or need?’”

A wheat market with a tight supply is going to require a good crop next year around the world. “You’re not going to have room to have many major problems anywhere,” Crow says. “We’ll need a big crop and we’ve got to plant a lot of wheat acres across the United States. Soft wheat acres are going to be up, but hard wheat acres probably won’t because we’ve already planted.”

While corn and soybeans have had pricing pullbacks, the wheat market basically has stayed sideways, Leblebijian notes. “Chicago wheat basis December has traded between $8.50 and $9.50 most of the summer,” he notes. “That also will see another run up. With this wheat market, if demand picks up globally, there is a lot of wheat, but I like the long side of wheat.”

Leblebijian also sees corn in the short-term dropping below $7 and on the upside trading as high as $8. “November beans? Anything close to $15 would be a good buy, and [we could] see trading back to about $16.50, maybe even $17,” he says. For December cattle Leblebijian likes the $124 range “per lot” and says that below that level he is a buyer. On the upside, “We can see $1.30 relatively quickly for Dec. cattle,” he adds.

Cekander adds that at some point, however, a good global growing season — which in his opinion hasn’t been seen since 2003 — could create some bearish scenarios for grains and livestock. “High prices brings acreage response around the globe,” he says. “If you ever get that good growing season and you have big crops elsewhere in addition to here — and you have all this U.S. export competition and now the users are used to buying from alternative suppliers — you can get fairly bearish outlooks at some point.”

On the other hand, he says, “Our demand is so big that we really depend on most of the world’s crop areas to have a good crop to have enough supply.”

What appears clear is that the 2012 drought is a multi-year story, of which we still don’t know the end. Cekander concludes, “You can have some big moves in both directions over the next several years. They’re going to be interesting markets.”

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