Expect Better Grain Demand . . . Just Not Right Away
Good crop prospects for the U.S. have prices on the slide. As prices move lower, the basic laws of economics suggest an incease in demand. We believe this to be true and expect demand to improve in the year ahead. However, we would caution those of you who believe that demand should react immediately. Often, demand builds and declines at a gradual pace.
We've seen some argument that demand may be lower in the year ahead. We don't see this as a likely scenario, especially in the corn and soymeal markets. Worldwide increase in livestock production, along with high profit margins for end users on all three fronts (livestock, ethanol, and the export sector), should provide opportunity for demand to grow. From a historical perspective, we wouldn't be surprised if corn export demand in the year ahead exceeds 2 billion bushels.
Projected exports for 2013/14 are 1.9 billion, up from 731 million from the prior year. Currently the USDA is suggesting exports at 1.7 billion for 2014/15. This is likely too low. Ethanol demand should exceed just over 5 billion bushels, and feed usage will gobble up most of the remaining supply at over 5.2 billion. Corn is the feed of choice, as is meal. End users are experiencing record margins and will continue with purchases.
However, as prices move lower, the most likely scenario will have end users buying only as needed and not locking in longer-term commitments. As prices decline, every purchase the day before the last will appear to be a purchase at a price that is too high. When prices signal a bottom, there could be an aggressive push by many to secure inventory. As of this writing, the crop has improved over the last 60 days, and there is no urgency or immediate need to lock in long-term supply despite the best opportunity to do so in at least four years.
In summary, look for demand to be on the rise in the year ahead. Corn prices will likely struggle for some time into fall on the expectation of ample inventory. Over time, supplies will diminish at a faster rate, and any perceived or actual problems with the crops elsewhere in the world could trigger a substantial price recovery. The same is true for beans. The world needs to grow two successive, large crops in order to meet world demand. If beans were readily bought by China at $12 or $13, they will be readily bought at $10 or $11.
If you have questions or comments, or would like help implementing strategy for the year ahead, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.
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