Grains Sector to See Moderation

With a return of normal yields for 2013 crops, grain inventories have returned to more balanced levels. World total grain stocks can be described as adequate with supply growing more than demand in the past year. As an example, world corn ending stocks-to-use ratios are now the highest they have been in the past five years. Soybean are the second highest in the last five years and wheat is the lowest in the past five years, but still considered to be adequate.

There has been a very large acreage expansion in the world and the period of rapid demand expansion has slowed with corresponding large increases in supply. It appears that supply has largely caught up with the demand surge and thus grain and soybean prices will likely be in a period of moderation from high price extremes in recent years.

Final 2013, corn production is expected to be about 14.1 billion bushels. This is roughly one billion bushels above the usage base and means final ending stocks will be about 1.8 billion bushels, the highest U.S. stocks-to-use ratio in the last five years. The immediate problem for corn prices is that the acreage base for corn has grown too large. Planted acres in 2013 of 95.3 million need to be reduced in 2014 and market prices are expected to provide incentives for some farmers to shift acres out of corn and to soybeans, wheat, and some other crops. It is also important to recognize that the ethanol component of corn demand has not been growing since the 2010 crop. Corn use for ethanol reached 5 billion bushels during the 2010 crop marketing year and has been around that level since. Under current EPA guidelines, it appears that corn use for ethanol will only grow modestly in coming years.

With more abundant corn supplies and sharply lower prices, the non-ethanol components of demand will recover. Animal industries are in expansion with the promise of more moderate corn and soybean meal prices in coming years. This means a series of years of rising corn use for feed. Exports are exhibiting a strong recovery after the drought reduced 2012 crop limited selling opportunities. Prospects are likely for a recovery to 1.5 billion bushels of corn exports from the 2013 crop compared with only 731 million bushels from the short 2012 crop.

Corn prices this winter are expected to trade in about a 30 to 40 cent band along the bottom of recent prices. There are large inventories of corn in outside covered storage and much of that will be moved to market by late-winter. Farmer selling is generally active in the early months of the year and this is expected to keep corn prices from have having any major price rallies. Basis levels are expected to stay weak through the spring and summer with abundant supplies. Mid and late-summer basis could collapse if a normal 2014 crop is developing. With a large anticipated carry out next August, old crop corn will have to be priced enough lower than new crop to encourage commercials to store the large carry out volume into another harvest.

Longer-term, futures markets are suggesting that producers need to find a way to drive their costs of raising corn downward. A reasonable goal seems to be to around $4.50 a bushel or lower. Soybean supplies are actually expected to be tight this winter as the world feeds from the U.S. supply. However, if the South American crop is normal size, world supplies will be adequate with falling U.S. prices into the late-winter and spring as those supplies enter world trade.

South American production is expected to be up by 7%, and the total South American crop will be 1.8 times bigger than the 2013 U.S. soybean crop. South America has clearly established itself as the dominant world producer by expanding soybean acreage nearly 4% a year over the past eight years. World soybean stocks-to-use ratios are expected to be the second highest in the past five years.

By the spring of 2014 U.S. acreage is expected to shift out of corn and into soybeans. The higher acreage base is expected to mean that 2014 U.S. supplies will exceed usage and thus substantially increase 2014/15 U.S. ending stocks. Under this situation, cash prices of soybeans during harvest would be $11 a bushel or lower.

Old crop soybean prices are expected to be supported by active Chinese buying. Cash prices that are $13 or higher generate strong returns for producers. While the overall price pattern over the next six months is expected to be lower, there can be some upside strength if a weather concern should develop in South America. Weather has so far been very favorable there with record production expected. However, since South America has become the largest producer, any weather concerns in January and February could cause beans to move upward toward $14 a bushel. While that is not in the picture now, the most important part of the growing season is still to come.

Producers with old crop inventory should consider adding to their sales levels with cash prices above $13. Then they should consider what percentage of their inventory they want to hold for the possibility of a weather concern in January or February with the chance that prices could be closer to $14. If $14 is reached many will want to liquidate considerable additional inventory and then hold on to a limited inventory for the small possibility that actual weather damage could occur with even higher prices. However, everyone needs to keep in mind that without a weather scare, cash prices could be closer to $12 and falling by spring.

Futures markets are suggesting that Midwest producers need to drive their costs of soybean production down to $11 or lower over the next three years.

New crop cash wheat prices are expected to be in the $6.00 to $6.50 per bushel range by harvest next summer. Those who can successfully produce wheat and double crop beans appear to have favorable returns for 2014. Longer term, producers need to attempt to get their costs down to $6 or lower.