Weather, China looming large
The weather and China. If you want to draw a bead on where grain prices are going, there are your new drivers.
That's the message from the CME Group floor Friday morning after USDA released bullish planting and stocks figures. Though USDA sees U.S. farmers planting more corn than they have since the 1930s, the supply of corn on hand is getting tighter. Add to that some weather uncertainty in the nation's major corn-growing areas and the prospect of unrelenting export demand from China, and the corn market, which will likely take both soybeans and wheat along for the ride, may have little to slow it down.
- Read more: Post-USDA markets will 'stay nervous'
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- 95.9 million corn acres in 2012 -- USDA
In the short term, though, soybeans may have more upside potential considering both the outside and fundamental factors in play. Corn may be the leader in terms of price trends, but once you it in to the soybean pit and add fundamentals like the short South American soybean crop, there's a lot of room to move for beans, especially considering Friday's USDA number for acres, which is 1% lower than last year, says Ag Resource Company analyst Bill Tierney.
"If you go back and take a look at the last 29 years and compare what the trade expected soyeban acres to be and what farmers said, there were only 2 years when the report came in lower than this relative to expectations. That's a somewhat unusual situation, and it's far below industry expectations," Tierney said Friday. "If you take a look at soybean market prices and how they change following reports, they're more influenced by the corn pit than their own fundamentals. The stocks report was very bullish corn, so you should get a strong response in the soybean market. On top of that, the dominant fundamental is the South American crop, and it's smaller. That's another bullish element the market has to contend with."
Now, add in the monster demand factor in the Far East. The economic malaise in Europe right now will ultimately find its way east and start to pressure China's economy, which some analysts have said is already showing signs of slowing. But, that will just amount to the nation's fastest-growing economy to simply "skin its knee" before getting back up and resuming the demand that's helped support corn prices in the U.S. over the last few months, says Scott Shellady, derivatives manager for ICAP Energy LLC in Chicago.
"I definitely think that in the next 2 or 3 years, we're going to have a banking crisis in China as well as rising demand. It's going to be interesting to see how they engineer a soft landing," Shellady said Friday. "The demand coming from China is only going to grow. We could be asking the U.S. farmer to step up to the plate even more for the next 30 to 40 years. We could be running out of corn before we run out of oil."
There is a single clear policy shift that Tierney says could make an enormous difference to the amount of grain China seeks out on the export market. Right now, he said Chinese officials have liberalized the oilseed marketplace to the point where today's government price controls pale in comparison to those of the past. That's yet to happen in the feedgrain sector.
"There has to be a clear policy change, and we haven't yet seen that," Tierney said. "We have seen market forces building and creating pressure on the government, and the government has not been able to purchase enough corn to fill strategic reserves. Until the government makes that change, we will still have that uncertainty."
Adds analyst Jerrod Kitt of the Linn Group in Chicago: "China's self-sufficiency in corn has been declining and we continue seeing their growth moving forward."
So, there's the demand picture. What about U.S. farmers' ability to meet those demands? At this point in the spring, based on crop inputs alone, there's not a whole lot farmers can do to change what they're planting this year. Kitt says as many as 2 million acres of soybean acres could be added depending on the more mid-term response of the market to Friday's numbers. "I do think there is some scope for soybeans to attract some swing acres. By this time, 95% of production is pretty much locked in, so there's very little room to maneuver," he says. "But, beans are trying to attract acres, and we feel they're probably doing a pretty good job."
On the other hand, Tierney says it will be weather, not a potential run-up in soybean prices, that bumps soybean acres if that shift happens. At this point in the spring, however, with farmers already started on corn planting, that may be a heavy lift.
"If corn is planted at an above-average pace, it tends to increase corn area. For whatever reason, farmers tend to have a bit more seed corn on hand. And, if they have an open window, they will plant all that corn, which typically means they cut those soybean acres," Tierney says. "I don't disagree that economics are better for soybeans, but acreage is usually more of a function of weather."