Exports could energize higher prices for grain
The grain outlook typically sees supply changes as the largest price influencer. But since the 2005-06 marketing year, volatility in demand has been an especially important price driver.
The recession greatly dampened demand for grains and oilseeds. Here’s a quick read on corn and soybeans.
If corn demand keeps climbing ...
Bill Tomek’s and Todd Schmit’s call: In the past 25 years, the national average has risen from about 100 to over 160 bushels per acre. And since the 2005-06 marketing year, corn demand has grown somewhat faster than supply. Based on that rising demand for a fixed supply, we estimate that December corn futures prices are almost $2 a bushel higher now.
• Rising corn demand could push prices higher in 2010.
• Exports will be a bigger factor in rising soybean prices.
• Feed cost relief for livestock producers may only be short-term.
Using USDA’s projection for the average farm price in 2009-10 relative to the stocks-to-use ratio, it appears that prices are settling down from the previous two years. But they’re still above the relationship that prevailed through 2005-06. The net effect is that the average farm price of corn is more than $1 a bushel higher.
Future demand is a major unknown. Demand for corn for ethanol is approaching a maximum, given total U.S. use of gasoline and the technical limit of using 10% ethanol in a gasoline-ethanol blend.
Export demand will grow slightly this year. Low livestock sector prices have dampened corn feed demand. But this type of demand can recover in the longer run.
Globally, total corn use has trended up, now projected to be over 800 million metric tons in 2009-10. Even with an upward yield trend, uncertainty persists about whether supply can match potential demand growth, especially from countries like China and India that have large populations and growing incomes.
Dunn’s call: Nearby corn futures are staying around $4 per bushel. The December 2010 is even higher.
Demand is the reason, as Bill and Todd said. USDA expects another 14% increase in corn used to make ethanol. It also estimates feed use to increase 3% and exports by 13%, leaving ending stocks slightly lower than for the 2008-09 crop year.
I think the ethanol estimate is too optimistic. The ethanol industry is in severe financial trouble. Other corn users have few alternatives and will bid the corn away from ethanol.
I also doubt USDA’s feed-usage estimate. The last two years have been very hard on meat producers. The recession is keeping meat prices low.
Exports are another matter. The weakening dollar, extremely low interest rates and the deficit might make coarse-grain exports stronger than USDA’s forecast.
So, I don’t expect corn prices to get much higher unless energy prices climb significantly. Should that occur, ethanol production might increase despite the industry’s challenges.
Soybeans have upside potential
Dunn’s call: With an anticipated large South American crop, world soybean supplies are expected to be high.
As with corn, U.S. soybean exports will be very competitively priced, given the weak dollar. China, where domestic production only meets 30% of demand, will import more.
Ending stocks will be greater, but not as large as the 2006 crop. That spells higher prices. High prices worldwide for edible oils are driven largely by biofuels and high feed prices.
The futures market has soybeans over $10 for all of 2010. I expect smaller livestock numbers will adversely affect meal prices. But higher energy prices could further increase soybean oil prices.
Meal is more valuable than oil now. But oil is more likely to move significantly. I don’t expect to see beans under $9 in 2010, and $12 could happen.
Tomek’s and Schmit’s call: Soybeans remain in rather short supply relative to demand. Crop-quality concerns still exist, due to wet harvest conditions in major producing areas.
In recent months, that small carry-in has created a strong export demand for U.S. soybeans. But if prospective Southern Hemisphere production is realized, prices will continue to be lower than last year.
USDA projects an average farm price about 75 cents per bushel below the 2008-09 level. But soybean prices are in a new, higher regime than was the case just a few years ago. Demands for both domestic and export uses remain quite strong relative to available supplies.
Where input costs, credit are headed
There’s good news and other news. Overall, farm inputs, including land and credit, should be no higher than last year. Costs of the purchased crop inputs should be 10 to 20% lower.
• Fertilizer: While demand will be strong this year, the market is very soft. Everyone seems to be waiting for prices to fall, despite that they’re already come down from last year.
Companies are waiting for lower prices to restock fertilizer, expecting prices to go down further. Last year, they stocked up with expensive inventories. When wholesale prices dropped, the retailers were reluctant to sell inventories at a loss.
Newer products and technology are making some farmers more precision-minded, with more targeted fertilizer usage and less overall. Localized shortages may occur due to equipment availability and transportation bottlenecks, if dealers wait too long to restock or farmers wait too long to buy.
• Chemicals: Like fertilizer, crop protection products will be cheaper in 2010 than in 2009. Demand is less as genetically modified seed is resolving problems that required chemicals in the past. Environmental awareness is also cutting into chemical use for some crops and locations.
• Seed: These costs will be higher. Genetic improvement comes with a hefty charge, but yield improvements justify it. Disease, insect and drought resistance are important GMO traits that improve yields and reduce production costs.
• The costs of purchased crop inputs should be 10% to 20% lower.
• Higher seed costs will be offset by higher yields and lower chemical prices and use.
• Changes in loan interest rates will be minimal for good credit risks.
Cheap, but tight money
The financial crisis and recession have caused banking behavior not seen since the Great Depression. Interest rates on savings are less than 1%, and some financial instruments are earning almost zero.
Banks still have a variety of problem loans, and increased fees. So, earnings are minimal, even with the widest interest-rate spreads in memory.
Agricultural credit is still available. Interest rates for farm loans aren’t expected to change much in 2010. But after 2010, inflation is likely, with all the government money pumped into the economy. Of course, inflation will increase rates on borrowing and deposits.
In this environment, banks will be giving extra scrutiny to any credit request. They’ll be applying new eligibility requirements. However, if you’re eligible, changes in loan interest will be moderate.
Dunn and Moore are Penn State ag economists.
This article published in the January, 2010 edition of AMERICAN AGRICULTURIST.