PRICES WHAT NOW?
The rally in corn, soybean, and
wheat futures prices that began in mid-December appears to have
stalled for the time being. Prices have traded in a sideways pattern
so far in February. The questions now being posed are, Is the
rally over? or, Is this just a pause in front of a larger price
Fundamentally, the improvement in
moisture conditions in South American growing areas and in some
parts of the U.S. have contributed to the recent price stall.
Confirmation of prospects for a large Australian wheat crop and
a slow down in the rate of U.S. corn export sales have also been
important developments. In general, however, the market believes
that world demand for grains and oilseeds is strong and will continue
to improve. Recent Chinese purchases of U.S. soybeans is a positive
development, as are the ongoing improvements in some southeastern
Asian economies and prospects for higher livestock prices.
The likelihood that China will be
accepted in the World Trade Organization and discontinue large
subsidized export sales of corn also suggests that Asian demand
for U.S. corn will increase in the year ahead. If China reduces
corn exports, however, it could be argued that corn production
there will decline in favor of other commodities, particularly
soybeans. A switch to other crops could damage export demand for
those crops, all other things unchanged.
Some also point to recent price
gains in other raw commodities and prospects for a higher rate
of inflation in the U.S. as reasons to expect higher grain and
oilseed prices. Those relationships, however, are not strong.
Prices of other commodities, crude oil and gold for example, have
increased for solid fundamental reasons, primarily supply reduction.
Those factors are specific to those commodities. The earlier rally
attempt in coffee was related to South American supply concerns,
but failed when weather improved. Grain and oilseed prices will
be influenced by relevant fundamentals, not prices of other commodities.
Similarly, a higher rate of inflation
in the general U.S. economy does not necessarily project to higher
commodity prices. Rapid economic growth and increased demand that
fuels inflation can also support commodity demand and prices,
but demand can be "trumped" by supply. Such was the
case at times in the 1970s and 1980s.
Fundamentally, the current situation
for grains and oilseeds is stronger than about anytime in the
last two years. World consumption is increasing and world wide
stock levels are declining. Prices are at low levels and world
economic growth is occurring. Many market participants now expect
further price increases, judging current prices to be under-valued
in a more favorable supply-demand environment. That is, many see
the current situation as a pause in a longer term trend increase.
The major question to be answered
is on the supply side. How big will crops be in 2000? The primary
focus will be on U.S. weather, planting intentions, and crop development.
The debate about potential magnitude of corn and soybean acreage
continues, with some arguing that corn acreage will once again
be reduced in favor of soybean acreage. If dryness persists into
planting time, a case will be made for below trend yields in 2000
and some further draw down of stocks.
Prospects for higher prices suggests
that producers move slowly in pricing the 2000 crop. If prices
move sharply higher in the spring, some consideration might be
given to options strategies to protect those higher prices moving
into the growing season. Producers may also want to consider crop
or revenue insurance instruments to reduce production risks. On
the other side of the equation, the current pause in the price
rally, or any short term price weakness, might be an opportunity
for livestock producers to capture some price protection of feed
needs into the summer and fall months.
University of Illinois