Burgeoning demand, coupled with last year’s Russian grain crisis, floods in China and Pakistan, dry weather in Argentina, and other crop adversities have sharply reduced supplies of major agricultural commodities, pointing to “a need for more planted acres in 2011,” says Steve Freed.

Barring another meltdown in the economy, commodity prices “probably won’t trade much below current levels” near term, says Freed, vice president of commodity market research for ADM Investor Services, who gave his insight on grain markets at the Mississippi Farm Bureau Federation’s Winter Commodity Conference at Jackson.

“Most economists feel we don’t have enough acres to plant in the U.S. to satisfy demand,” he says.

“If you ask traders in Chicago what they think will be a roadmap for prices in 2011, they say 2008. If we lay the 2011 chart over 2008, from a price standpoint and a timing standpoint, we’re almost following the 2008 markets one for one. There’s no guarantee we’ll continue to follow them, but 2008 is the roadmap everyone’s looking at.”

Looking at historical trends, Freed says, over the last four years from mid-January to the peak of the market later in the year soybeans saw about a 60 percent to 70 percent rally and a $14-level price. “A similar percent rally in 2011 could mean $18 beans. A similar rally, mid-January to the high, would put corn around $7.80, and wheat somewhere around $9 to $9.50.

“Right now, soybeans are now the bull leader, and some economists are saying supplies are going to be really tight at the end of this year and into 2012.” The January USDA report was bullish, he noted, particularly for beans.

Strong global demand for grains

“Over the last five years, we’ve seen a 255 million to 315 million ton increase in global demand for soybean uses, and most of that has been in Asia,” Freed says. “The market is also concerned about whether we’re going to have enough corn production worldwide to satisfy demand over the next five years. In wheat, we had a couple of years when production rose above usage and prices went down. This year we’re expecting production to be below usage, and while growth in wheat demand for the next five years is not going to be as great as for corn and soybeans, there is still going to be demand for acreage planted to wheat.”There is “a lot of support” around the $5.50 price level for corn, he says, “and I don’t think the market will trade below that until we know more about acreages this year and weather patterns. Some people think that if we ratchet up ethanol demand it could take nearby corn futures to $7 — that if we want to buy acres, we need to take corn to $6.25.

“If we were going to change anything in the USDA estimates, we’d probably add another 100,000 bushels of corn for ethanol usage. Ethanol is here to stay, and that usage will continue higher.

“Things are really going to get tight for corn usage around Aug. 1, particularly if we have a late-planted crop. Corn ending stocks will remain low unless we just have a super crop. But looking all the way back to 1980, the number of days of world corn supply is now at a record low — we don’t have a lot of margin for error, whether from a weather standpoint or from a demand standpoint.”

La Nina and other weather concerns

2011 is a La Niña year, Freed notes, and projections are for dryness across most of the Northern Hemisphere, which will probably continue into spring. Rains in Australia and across the Southern Hemisphere could adversely affect their wheat crop and increase U.S. export demand. Concerns about cold weather in Russia and China and dryness in Argentina could also have an impact on U.S. exports if those countries don’t have good crops.

 

“Looking to the March-May time period, we’re concerned about the wet forecast for the Ohio River Valley — that could mean late corn planting. Beyond that, climatologists are concerned about the possibility of dry conditions from July through early September across the Midwest.”

Over the last 15 years, Freed notes, December corn has tended to make its high in the March-April period. “I think basis will tell us around April 1-15 just how tight the situation is relative to demand.

“Soybeans have already pushed through a lot of key price resistance levels, and the export demand could be a little better than the USDA is saying. Total usage trends continue to move higher, most of that due to export demand. The number of days of U.S. soybean stocks is at a record low versus demand. Technically speaking, we’re looking at much higher prices.”

Wheat is “something of the laggard” in the marketplace, he says. “The most important factor in wheat now is the condition of the crop in Kansas, one of the lowest we’ve seen. If the weather continues dry there, it could put a premium in the wheat market.

Analysts looking for more grain acres

“We already know farmers have planted 4 million more wheat acres, but analysts are saying we could see 4 million more acres of corn, they’re talking about 2 million more cotton acres, and are saying we probably need at least 2 million more soybean acres. I don’t think it quite adds up that we’ll see that many more acres. The next big USDA report is at the end of March, when we will get planting intentions.

“Looking at cotton, it’s really interesting to see a market that has had its highest price since the Civil War. The question is whether we’ll have enough supply to meet demand, and the perception is that the cotton market still has price potential.

“I personally have not recommended selling any 2011 corn yet,” Freed says. “I think $6.25 is where I’ll start selling. I also haven’t sold any 2011 soybeans; $13 beans is going to be a good sale for me. I think if you don’t sell beans at $13, you’re playing more of a speculative game than locking in some kind of profit.”

Demand for commodities by China will be a significant influence on markets, Freed says. “When I visited there, I came away with these key impressions: They’re going to continue to buy commodities; 70 percent of Chinese farm land is irrigated, with an average farm size of 7 acres; and they do not believe they have enough water to grow enough crops to satisfy growing demand and that at some point they will become a net importer of food.

China a major player in marketplace

“They also believe that 20 years from now the world is going to begin running low on fossil fuels and that they’re going to have to come up with alternative fuels. They are buyers in the energy market to increase their supply. The Chinese now buy more cars than the U.S. and Japan combined, and the numbers are going to increase, which will escalate their demand for energy.

“China is going to be a big player in our marketplace. Of their 70 million tons of demand for soybeans, they import about 55 million tons. The U.S. produces 90 million hogs a year — the Chinese produce 600 million, and they want to double that. One exporter says that by 2015 China will be importing 70 million tons of soybeans and 30 million tons of corn.

“Whatever size corn crop China grows, that’s what they’re going to use internally. A factor that can influence the corn market is that the Chinese congress will meet in March to look at whether or not they want to establish a domestic ethanol program. If they do, they’ll probably come into the market to buy corn, and we hope some of that will come from the U.S.  The market is extremely sensitive as to how much corn they’re going to buy, so mark your March calendar and watch what they say in their congress about ethanol production.”

Changes in the dollar’s value will also be a factor, Freed says. “A lot of money nowadays is linked to the markets: if the dollar is lower, commodities are higher; if the dollar is higher, commodities are lower.”

Other factors that will have an impact on grain markets include the 2012 elections in the U.S., measures to deal with U.S. debt, and tax reform legislation.

Strong flow of money into commodity funds

Money going into commodity investment funds will also be an influence on markets, he says. “One projection is that money going into commodity markets will reach a half-trillion dollars, up from $360 billion last year and $270 billion in 2009. With low interest rates, a lagging housing market, and a lethargic economy, investor money is looking for other places to go. The investment firms are saying that commodity markets will continue to trade higher, at least for the first half of this year.

“We also have to look at U.S. debt, which going out to 2030 is projected at $20 trillion, and the impact that will have on the dollar. Most economists will tell you that long term they’re negative to the dollar, which would be positive for commodity prices.”

U.S. farmers “are doing very well right now from the standpoint of net farm income,” he says, but a recent survey of growers across the Midwest showed “their major concern is that, as grain prices go up, so do costs. What happens, they ask, if they have a perfect crop this fall and prices drop below what it cost for them to put it in the ground? That can happen in any year. I think this year crop insurance is going to be critical.”

Commenting on farm land values, Freed says, “When I graduated from college in 1976, I planned to farm, but land in central Illinois was going for $5,000 an acre. Recently, land near us sold for $9,700 an acre. In Iowa just recently, there was a bidding war in which land went for $13,000 an acre.”