There's a strong possibility that corn and soybean prices will move sharply higher this spring, likely led by beans, according to market analysts speaking at a CME Group press briefing on USDA's November 10 crop production report.
USDA estimated a 12 billion bushel corn crop with ending stocks of 1.12 billion bushels. Soybean production was estimated at 2.92 billion bushels while ending stocks were left unchanged from the previous month at 205 million bushels. Wheat ending stocks at 603 million bushels, are higher than most analysts expected.
According to Gavin Maguire, with EHedger, USDA's reduction of U.S. corn exports by 50 million bushels, “has to do with corn having to compete with an abundance of feed wheat over the next 3-6 months.”
Overall, I think we're probably going to have too much wheat for global demand requirements this coming year. Wheat prices are probably going to struggle to avoid further weakness over the medium term.
“If any market is going to push higher going into the new year, it's probably going to be soybeans,” Maguire said. “For the next several weeks, the Southern Hemisphere is going to become the focal point of the market.
“If South American farmers encounter any problematic growing periods, that will send a price signal to the U.S. producers that we need more beans this spring. With the trend already lower in Brazil, we should pay close attention.”
USDA lowered the soybean crushing pace in November, “which is not really all that surprising,” Maguire said. “We would argue that soybean exports will trend higher from here rather than lower. We're a lot more bullish on the bean numbers than USDA's November numbers suggest.
According to Jack Scoville, Price Futures Group, the markets for corn and soybeans “are trying to put in a seasonal bottom right now. For corn, the downside is $3.50 to $3.75 - somewhere in there should hold the market. As we get into the planting season, we could head back toward the $5 area, especially if the beans hold.
“Beans are probably the leader to the upside,” Scoville said. “We could see prices inching back toward $11.50 to $11.75. On the downside, I think we're near the lower end of the soybean trading range right now. I think we're also at the lower end of the trading range for wheat, but wheat doesn't really have much upside potential, so I see it staying around the current area.”
Maguire says that corn prices could head a dollar higher from current levels. “We need to find a price where we routinely see a million tons of corn sold to overseas buyers. But that is not going to happen anytime soon.”
Farmers need to “recalibrate” their price expectations for the corn market, according to Maguire. “As soon as we resurface above $5, we're going to see a steady stream of selling from the farmer. And that is going to lock the corn market into a sideways trading pattern. So we're seeing farmers taking corn off the market and sitting on it today, but they're waiting to sell it at profitable levels.”
“Producers are not real thrilled with prices where they are now compared to what they saw in July,” Scoville added. “Soybean producers see the same thing. They know what's going on down in South America. If they think there's a chance to get higher prices down the road, they'll try and store as much as they can. I think this will limit the downside, at least in cash.”
Maguire noted that commodity funds may be looking at getting back into the markets, despite the brutal beating they've absorbed over the last few months. “If you were a long-only fund since July, you've had the worst returns in history. Many of those funds are still licking their wounds. On the other hand, one thing that is encouraging from a commodity participation perspective is that nothing promotes the merits of diversification better than the threat of a cataclysmic financial meltdown.
“Commodities aren't correlated very strongly with stocks and bonds and many of these markets are starting to look quite cheap. Buying crude oil at $120 was not a good idea, but they do like to look at buying at $40.”
The funds will be more cautious this time around, according to Maguire. “Yes they're going to come back into the agricultural commodities, not with the same vigor, but they'll be more selective. That could definitely help these markets recover quite strongly in 2009.”
“We've seen a lot of redemption coming from the index funds,” Scoville added. “No. 1, they're not doing too well these days, and No. 2, maybe their clients aren't doing as well either.
“There are a lot of people out there who believe in being long commodities for the long haul. As we develop an inflationary situation here and around the world, I think we'll see an uptick in demand for commodity products. They may be less active and deal with less volume, but they're not going to go away.”