Kottke Commodities – A Sea Change in World Grain Prices
After persistent rain-delayed spring planting, a clearing window allowed its completion – and consistently excellent crop-development weather has prevailed since. On May 18 U.S. planting was decidedly behind average pace, verging on price bullishness, but only a week later it had leapt ahead. About 90% of the Corn Belt received normal to above-average spring rainfall, which together with moderate temperatures has supercharged growth progress. The result is no less than a sea change in prices which have been kept high in recent years by harvests lagging amid demand growth.
Compounding the bearishness of larger grain and oilseed supply is possibility of reduced or low demand growth within the U.S. meat industry. Normally grain and soymeal consumption surges ahead when their prices decline and meat-production profits expand. Particularly in the current environment of record-high meat prices and growing export demand, it would seem that the price incentive to expand use of feed ingredients would do much to offset larger supply in the coming crop year. Instead, the coincidence of a herd-reducing hog disease, multi-year drought in cattle pastureland, and a poultry industry reluctant to expand add up to potential for sub-par demand reaction to larger harvests in the new crop year.
That was the major factor that foiled our trading in the last few months. We based positions on an outlook for tight corn supply into the summer quarter. At each step along the way evidence confirmed, as the cash-basis levels on which our trading turns worked steadily higher from winter into spring. In the end, after record spot meat prices encouraged heavy slaughtering to meet demand, the U.S. ran out of livestock mouths to feed. That’s why meat prices continue to rise at your local grocery even as corn and soybean meal at the Chicago Board of Trade continue to decline.
While the expanded corn supply may not immediately elicit a demand reaction, the drought and disease-reduced U.S. winter wheat crop has experienced the normal, opposite reaction of cutbacks in demand. Soybeans appear to be the wild card – the one commodity whose much larger planted area and excellent prospects may generate demand growth sufficient to prevent further sharp price decline. Per above, that does not appear likely to originate in the U.S. right away. Rather, as discussed in last month’s commentary, it’s quiet evidence of rapid growth in the developing nations whose economic statistics cannot be measured with much precision.
Every crop year presents a different environment – radically changed, in the case of the approaching 2014-15 – which our pricing strategies must address. The trading objective in the coming grain-marketing year is to spot the point at which lower prices stimulate demand growth sufficient to complicate the situation. How fast will the hog industry rebound from the outbreak of piglet mortality, and when will the poultry industry resume expansion to grow revenue? What pattern will farmer selling describe, and how will elevator hedging strategies change the intra-market spreads? In reaction to the sharp decline of prices from recent years of high farmer profits, how far and fast will politicians in grain-exporting nations compel further domestic use of food for fuel?