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2014 Price Outlook: Bear or Bull?

Friday, February 7, 2014
filed under: Marketing/Risk Management

The January series of USDA reports weren’t as bearish as the market was anticipating. The trade was expecting an increase in the corn production estimate and, instead, the USDA reduced the yield slightly. The December 1 corn stocks number was also well below what was expected, and corn ending supplies dropped from 1.8 billion bushels in the December report to 1.631 billion in the January report. That is still not a bullish corn number, but it is far below the 2.0-billion-bushel number many analysts have been talking about. It should remove the extreme downside price risk that has been hanging over the corn market.

The wheat report numbers, on the other hand, were somewhat bearish. The December 1 wheat stocks number was higher than expected, and wheat ending supplies were increased as a result. U.S. wheat ending supplies are still projected to be more than 100 million bushels below last year, but the market still viewed the report as bearish.

The soybean ending supply estimate was left unchanged from the previous month at 150 million bushels. A slight increase in production was offset by similar increases in demand. U.S. old-crop soybean supplies will again be very tight.

The USDA also released their “final” 2013 sunflower production estimate. They pegged the total (oil and nonoil) crop at just over 2.0 billion lbs. That is down 27% from last year and the smallest sunflower crop since 1989. Planted area for sunflower was the smallest since back in 1976. The reduction in sunflower acres continues to reflect the big shift to corn and soybeans across the Northern Plains.

Oilseeds markets are posed with an interesting dilemma over the next couple of months. Demand for U.S. soybeans, specifically to China, has already exceeded expectations, and total U.S. soybean export sales are now above the total annual forecast with seven months of the marketing year remaining. The market has been expecting to see cancellations of sales to China; but, instead, China has continued to buy more cargos. At some point this will have to change because the U.S. simply doesn’t have the soybean supplies to sell.

At the same time, soybean production estimates for South America continue to increase with good weather in Brazil and generally good weather in Argentina. It was very hot in December and early January across much of Argentina, but estimates of potential yield losses were not significant. So we will have one of the smallest soybean ending supplies ever in the U.S. while South America will likely produce a record crop. In addition, it is also probable that farmers in the U.S. will plant significantly more soybeans and less corn in 2014. This all paints a bearish oilseed outlook going forward, assuming normal weather.

None of this bearishness is new to these markets. In fact, some would argue that most of the bearish news is in the market. We have been talking about record soybean production in South America for several months. The USDA’s February Outlook Conference will likely highlight the shift from corn to soybeans. The large speculative trading funds are already holding record short positions in wheat futures and substantial short positions in corn futures. They are still long soybean futures, but that length has been significantly reduced. On the other hand, China’s soybean imports in December set a new record. World demand for all grains and oilseeds is getting larger, not smaller, and we expect this trend to continue with sharply lower commodity prices.

February will also be important to markets because the initial (and minimum) crop revenue insurance prices will be established. They will be far below the previous year’s levels, barring some totally unforeseen bullish event that pushes prices sharply higher.

The next important series of USDA reports will be the planting intentions estimates and the quarterly stocks estimates, both of which will be released the last day of March. The big questions ahead of these reports will be:

• How big will the shift out of corn and into other crops be in 2014?

• Was the December 1 corn stocks estimate legitimate or not?

You can build bearish and bullish price outlooks for 2014. It depends on what you choose to use for planted acres and yields you use in your projections. Record yield estimates mean bearish price forecasts; average yields are not so bearish, especially for wheat and feed grains. Remember, too, that world consumption gets larger every year.

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