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Offsetting market anxiety by understanding global dynamics

PD Editor Karen Lee Published on 10 December 2012

Commodity market graphs of recent years are commonly compared to roller coasters with all of their ups and downs. Much like the feeling of climbing the first big drop of a roller coaster, anyone in agriculture today can be a bit anxious of what will happen next.

At the Vita Plus Dairy Summit, Dec. 6 in Merrillville, Indiana, Joe Kerns of Kerns & Associates of Ames, Iowa, tried to calm everyone’s fear of the unknown by explaining what is taking shape in the marketplace.

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Thanks to changes to the Dodd-Frank Act, Kerns began with a disclaimer that all information shared is “in his opinion” and should not be construed differently.

Old crop corn at this point in time is dependent upon exports. This market analyst sees a massive opportunity for the livestock production sector in the form of lower prices of corn. If “normal” yields are achieved with next year’s crop it should equate to cheaper corn.

As per soybeans, demand from China will lead the market around by the nose, Kerns said. Brazil and the rest of South America will be asked to supply most of China’s needs as the U.S. had a short crop this year.

End users of these commodities have limited coverage right now. The ethanol industry is operating hand-to-mouth and livestock producers are not willing to lock in high futures prices. Poultry is the only livestock species that can expand rapidly and he doesn’t see any indications that it will be adding production.

Therefore, “I think we are set up for an absolutely fantastic 2013,” Kerns said.

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One of the few things that could change that is Mother Nature. The latest drought monitor shows the eastern U.S. is generally devoid of drought, which should prove well for corn.

Everything west of the Mississippi is still covered in drought and will most likely impact the wheat market. However, weather affecting next year’s crop is yet to be seen.

“Spring rains are a heck of a lot more important than how we put corn to bed in fall,” Kerns said.

Since 2006 the row-crop producer has had unprecedented income, mostly driven by ethanol, and heading into 2013, the return on corn, soybeans and wheat have never been priced better at the time of planting.

“Profitability is going to last into next year and maybe a couple of more,” Kerns estimated.

Playing with some numbers, he said 2013 is not going to be a game of perfect, all we’ve got to do is come close. When he entered normal yields and increased demand more than what was seen in the last few years, he still calculates enough carryover to result in $4.50 corn.

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In his opinion, corn growers might benefit from locking $6 corn for next year, but on the livestock side he won’t touch corn with a 10-foot pole.

He did not think old crop corn will move from $7, with the belief that China is as hungry for corn as it is soybeans. It most likely will not go towards ethanol as gasoline usage is down, resulting in less of a demand for ethanol.

For the first time ever, Kerns reported, Brazil will produce more corn than the U.S. in 2012. U.S. was king here for a long time, but Brazil was getting closer the last three years and because of the drought they will overtake the No. 1 spot.

The stocks-to-use ratio in corn and soybeans is down 5 to 10 percent, but wheat carryouts are comfortable at 30 percent.

“We are not running out of wheat in the world,” Kerns said. There was a food/feed crisis throughout the world in 2008, but we are not near those critical levels now. In addition, revenue for producing wheat is as high as it has ever been and that will bump up wheat production, he added.

The U.S. is also on the cusp of playing a much more interesting role in terms of exporting wheat. It has been devoid of the world wheat market until recent years.

Soybean stocks are so low that the U.S. is likely to run out of soybeans, Kerns said.

Thus far, the soybean producer has had the upper hand in setting the price of protein, but if there is a normal development of the South American crop to fulfill China’s needs, the U.S. soybean producers will be left with our domestic livestock producers, who will most likely turn down buying soybeans at high prices.

The problem with the soybean stocks is China is taking all of our supply right now, Kerns said. Poultry producers are going to use all of our available supplies as well and the question is if we can make it until South America’s harvest. Ultimately it will drive up plantings and the U.S. will be okay at its harvest.

In conclusion, Kerns said corn is range bound, and not going further. The basis is likely to remain firm into summer, with plenty of price buffer built in for new crop. Producers with soybeans in the bin might want to consider selling them now and purchasing soybean meal out in the summer months.

Granted the roller coaster of commodity market isn’t likely to end anytime soon, but knowing what is coming around the next bend might help make livestock producers a little less anxious. PD

00_lee_karen

Karen Lee
Editor
Progressive Dairyman magazine

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