High grain prices make farmers happy, but they make market analyst Chuck Penner nervous.
It’s not that Penner, with LeftField Commodity Research, doesn’t like high prices. His apprehension comes from knowing sometime those prices will fall. When prices last spiked in 2007-08 at close to these levels, they went a bit higher and then fell rapidly.
“This is where I start to get a little nervous, when we are closer to those highs because typically those highs happen when demand drops off or production kicks in or both,” Penner told the Manitoba Special Crops Symposium in Winnipeg Feb. 9. “So far the demand doesn’t seem to be slackening off at current prices, so there may be a little life left in this, but it does make me nervous.”
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Penner is also skeptical about a permanent shift to higher grain prices as some analysts are predicting citing a growing world population. Population growth is a longer-term trend.
MARKETS CYCLICAL
Markets are always cyclical, Penner said. Even if prices remained high, farmers would see their margins shrink as their increased earnings became capitalized in land and machinery and eroded by higher fertilizer prices, he said.
“I don’t mean to be a downer, but when you see these types of things view them as selling opportunities and profit-taking opportunities because eventually your margin is going to work back to that same (level as before),” Penner said. “Higher prices are great short term, but longer-term markets tend to make adjustments and bring things back into a kind of balance.
There’s 30 million ha of non-rainforest land that can be brought into production in Brazil, Penner said. That’s like adding another Western Canada. There’s underutilized land in Ukraine and Russia too.
Penner warned farmers not to market their crops based on headlines. Right now most of the market news is bullish, but Penner said the best cure for high prices is high prices. Prices will fall, but when and by how much nobody knows.
STRONG PRICES
Corn and soybean prices are strong because demand has been outstripping supply, Penner said. Prices are expected to continue to be strong heading into spring as the battle for increased acreage in key crops is played out in the futures market.
The popular view is corn will win because gross returns are higher, but when cost of production is taken into account there isn’t much difference between projected corn and soybean earnings, Penner said.
“I don’t necessarily see a whole bunch of acres swinging into corn from soybeans.”
Strong corn and soybeans prices are pulling up the value of other crops.
American corn supplies are very tight, with use outstripping production in 2010 by almost one billion bushels, Penner said. The U.S. is projected to produce 12.77 billion bushels of corn this year, but consumption is forecast to hit 13.6 billion bushels.
“That’s unsustainable,” he said. “We (in North America) can’t run a deficit of 800 million or 900 million bushels again. It’s just unsustainable. Ending stocks are (estimated to be) less than 700 million bushels now. We simply can’t run a deficit that large again. Something is going to have to give.”
Most of the increased U.S. demand is from ethanol. Penner said U.S. corn exports and domestic consumption for food and feed is flat. If energy prices remain high or rise, the demand for corn to make ethanol will continue to grow, he said.
STRONG DEMAND
U.S. soybean consumption has been exceeding production as well, Penner said. “Shortages in the U.S. mean screaming high prices everywhere else,” he said.
China, once a soybean exporter, has been a big importer lately. And not just of U.S. soybeans, but from South America and even Canada.
“They (China) are absolutely going crazy for soybeans,” Penner said.
“I’ve seen beans go out of Vancouver. I’ve even seen soybeans go out through Prince Rupert. I’ve never seen it before.”
If China stops buying soybeans or even slows down because it has a good crop, that could cause soybean prices to fall.
“But on the other hand if that drought (in eastern China) just continues to roll on then we could see this market take off again,” Penner said. “Looks like there’s going to be a lot of volatility in the coming months largely due to crop reports from the U.S.”
UNKNOWNS
There are always unknowns, including the weather, which affect markets, Penner said. Political turmoil, embargoes, inflation and interest rates can all have an effect. Will the uprising in Egypt get worse or spread?
“We don’t know if that’s going to increase demand or decrease demand,” he said. “Arguments can be made on either side. We simply say there’s room for volatility here and manage risk accordingly.”
Sunflower stocks in the U.S., especially for oil, are in tight supply too, Penner said. Confectionery supplies are more plentiful, but strong vegetable oil prices have kept sunflower prices up.
Canadian sunflower production, especially of confectionery varieties, has suffered the past couple of years due to disease and poor growing conditions. Those problems, plus strong prices for other crops, are likely to result in lower sunflower production in Canada this year, Penner said. [email protected]
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“Higherpricesaregreatshortterm,butlonger-termmarketstendtomakeadjustmentsandbringthingsbackintoakindofbalance.”
– CHUCK PENNER
