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Bullish but volatile grain trend ahead -- analyst
There's been a lot more land thrown into crop production in the last few years in the U.S. And, there have been a lot of yield advancements, leading to some major crop sizes when Mother Nature doesn't treat farm country too poorly (like in 2012).
That adds up to a lot of grain. But, is it too much? Thinking domestically, it may appear that way, especially when the marketplace jolts prices lower from day-to-day based on whispers of lagging demand and more-than-ample supply. But growth beyond U.S. borders will continue to keep demand tight on ever-growing crops, and in the long run, that demand will keep market prices from falling too much. But, the boat's not going to be exactly sailing on the smoothest waters for the foreseeable future, one market analyst and broker says.
It's easy for the marketplace to see growing crop production as surpassing demand and outstripping profitability and keeping market prices low. That's an easy assumption for those outside the ag markets to make. But, the 2 sides of the equation are closer together than many think, and there's reason to be more bullish in the long term, says Roach Ag Marketing broker and market analyst John Roach.
"What people tend to do is look at production records and extrapolate that on forward. The extrapolation of production is sometimes not as easy to do on the farm as in Chicago. This potential that we're raising too many acres of crops is permeating through the market. If you look at the crop areas, you can see the acreage moving over time across all of the different commodities. We're increasing acreage at the same time we're increasing yields around the world," he say. "I think the long-term outlook is actually bullish, and I'm looking at what we have to do to supply growing demand around the world. We have to raise bigger and bigger crops, and that's a challenge. The driver of that challenge is population."
Though world population growth -- which will be greatest in sub-Saharan Africa -- will continue to underpin upward-trending grain prices in the long term, there will be fluctuations in acreage as prices bounce in a range, Roach says. The broker's a proponent of "oscillation" marketing, that is, making incremental sales at the regular cyclical times when prices will naturally bounce to the high end of a range that will ultimately be decided by demand, both at home and abroad. And though it's likely going to be a bumpy, up-and-down ride now through spring and early summer, the demand side of the equation will likely create a mostly upward price trend, Roach says.
"We think the winter price lows are in right now, and we should see some firming moving into spring. I thin you have to adjust your profit expectations. We're not going to see those profit levels of the last couple of years. We're going to have to grow that business back up again," he says. "It would seem to me that the price levels we're looking at now are toward the low side of where we should be, but if we were to have a very strong harvest this year, we could sure have a low made at harvest time, and that low could be the bottom of our new plateau. We must raise big crops to satisfy demand."
How, specifically, will that demand shake out this year? As of late January, Roach sees soybean demand moving slightly higher, leading to a potential increase in bean acres planted this spring. But, Roach is cautious about too much expansion in soybeans, considering the makeup of the world market for that crop right now.
"We'll need 2% to 4$ more soybeans next year. That will probably be easier to get, because I think there will be quite a bit of switching," he says. "Who's buying the beans? We don't have much expansion in demand from anybody buy China. It's a 1-country market, and we have to be very careful about that, because if anything goes wrong with China, that's really going to impact our soybean market."