Commentary courtesy of Cory Bratland; Kluis Commodities Chief Grain Strategist, USA
Wow! What a change in the landscape of the commodity world. It is hard to believe that in just nine months we can see grain prices rally between 36% and 70% from the lows just last April.
It was tough to project a profit last year. This year, the challenge is deciding which crop to grow in 2021. This impressive move was a surprise to everyone (including us). And as hard as it is to believe, even as soybean cash markets in Western Canada have achieved over $15.50/bu and over $6.50/bu for corn, it still feels like prices can move even higher.
Where do we go from here? What does the future hold? Let’s start by looking at how we got here. How did soybean prices on the Chicago Board of Trade go from $8.08 (last April) to over $13.75 today? Start by looking at last year’s US corn and soybean crops. The US got planted under good conditions, had plenty of rain for most of the season, and got a touch dry as the crop moved into August. That combination still gave a good crop (although lower than earlier projections): over 4.1 billion bushels of soybeans, and 14.5 billion bushels of corn.
In South America, farmers planted more soybean acres than ever. The crop got planted later than normal due to dry conditions, but progressed very well since. The later-planted crop means that they will also have a late harvest. As a result, there will be a bit more demand from North America until they get harvesting in South America. Recently, Argentina has been experiencing some dry conditions and their crop is getting smaller. Brazil’s crop seems to be stabilizing, but isn’t quite as big as the early projections. On the other hand, South America planted more acres than ever. Even with the smaller crop, South America will be producing 185-190 million metric tons of soybeans and 160-165 million metric tons of corn. Both crops are up from last year’s large crop.
If we don’t have a supply issue, then what is driving the markets? Demand. There are two types of bull markets we trade: Supply-driven and demand-driven. In supply-driven markets, we are producing too much grain (or too little). A good example was 2012: The US had a widespread severe drought that year, and nearly ran out of corn. In response, the market rallied high enough to curb demand, so we could start building stockpiles again. That, in turn, led to the US growing several large crops in a row, which increased our supply almost too much. (Result: Grain prices were under pressure for several years.)
Lower prices increase demand. That is exactly what has been taking place the last several years. With prices for all three major commodities (corn, soybeans and wheat) under pressure, demand has grown and how! That is where we are today–smack dab in the middle of a demand-driven market.
It wasn’t one specific event that brought us to today’s markets. Instead, it was several effects that have all been building for a few years. In addition to increasing global demand, we had a trade war with China. Since China refused to buy grain (especially soybeans) from the US, they dipped into their reserves. By now, we hear their reserves are really low, and they need to rebuild their supplies. They are on a mission to buy grain not only from the US but worldwide.
To top it off, we had the Covid-19 pandemic. Initially, it caused a lot of concern about demand, as we watched countries shut down. However, many buyers (whether businesses or countries) may have looked at their stock on hand and realized they might not be able to handle another shutdown, and keep their customers and residents happy. As a result, we have been seeing more countries issue export quotas and increase taxes on imports. They want to make sure they are keeping enough supply around for their people.
What next? Demand-driven markets like we are in right now usually last longer than expected. As we look at the high prices today, we really don’t see much price rationing. It feels like prices will need to rise more. When we look at the past world supply and demand reports, this is pretty obvious. The world is switching to wanting more corn and soybeans, and not as much wheat. Wheat demand is increasing but not to the extent of soybeans, for example. Over the last 10 years, demand for world soybeans has grown 43% and wheat demand has only risen 8.6%. Since the world is demanding more soybeans and corn, this will help keep prices supported.
Demand-driven markets are much more fun. As China and other countries look to rebuild their supplies, we could see this strong demand hang around for a few years. When I look at the major crop alternatives for 2021, I think soybeans offer the greatest profit potential, corn second and wheat a distant third. It will still take some risk management on your farm, but the future of agriculture looks bright.