2012 grains 'down, not out'
World inventories of grain are still at or near historical lows, and that means the "long-term bull run" in the ag commodities isn't over. But, it may seem like it at some points in the next 12 months, according to a new outlook for ag sector prices by Rabobank officials.
There's a tug-of-war underway between downward pressure from the general economy and potential for major demand growth around the world. Throughout the next year, whichever of these factors pulls harder will be the one that determines which way prices will move in a range that will likely continue to trend higher.
"We believe the long-term bull run in agri-commodities remains, but expect prices across the complex to ease from their recent record highs, continuing their downward trajectory in place since mid-2011," according to a Rabobank report from analysts Luke Chandler, Keith Flury, Erin Fitzpatrick and Nick Higgins. "Elevated price levels must persist in order to encourage farmers to continue expanding production to keep pace with demand growth and allowing global inventories to rebuild. Agri-commodity demand should remain robust in 2012 as consumptive growth in emerging-market economies continues to drive the agri-complex."
One major reversal that the commodities could see in the first part of 2012, accordingi to Rabobank's report, is a return to fundamental factors after the trade has spent much of the latter part of 2011 tuned in more closely to outside factors like the European debt situation.
"We see upside from depreseed spot prices for corn, wheat, soybeans, sugar and cocoa as fundamentals reassert themselves and market participants continue to come to grips with the European debt crisis," according to Rabobank's report.
Specific to corn and soybeans, Rabobank specialists see generally lower year-over-year prices for 2012 versus this year, but they'll still remain at profitable levels. For corn, prices will rise above current levels for the first half of the year, Chandler and other specialists say, before slipping in the fourth quarter of the year "on record production."
For soybeans, prices will also dip in the next year, though Chandler adds they'll "remain historically elevated, rationing demand, as global production declines."
But despite a renewed focus on grain fundamentals, outside factors like global economic uncertainty will remain in in the back of traders' minds throughout the year. So, while the tug-of-war between outside factors and fundamentals in terms of their influence on the grain markets will remain in play, fundamentals will likely win out.
"A recession, if it does occur, would be expected to be shallow and not to impact agri-commodity demand. Recession or slowing economic growth will be a threat to the agri-commodity markets in 2012, but in our view the expected resilient demand growth from many agri-commodity markets in emerging economies will help mitigate the impacts from any economic downturns," according to Chandler and other Rabobank specialists. "We anticipate lower-than-average stock levels of many agri-commodities to support prices; while harvests are expected to be large, encouraged by the high prices, the supply response is still catching up to demand."