I started writing for DTN in 1994. So that means through the years I’ve written a lot of outlook columns of the years ahead. So with that in mind, I looked back at what I wrote in that first January at DTN. Here’s an excerpt of the first paragraph.
“This year I’m looking for record high hog prices, $10 soybeans, $4.50 corn and 50 tonne per acre tomato crops. Wait a minute. There is a Santa Claus but he came a couple of weeks ago. Maybe I should be predicting record low hog prices, $6 soybeans and $2 corn. There is something about a new year that brings us back to reality.” (Under the Agridome Jan 4, 1995.)
That seems a world away now. In 2011 we have $12-$13 soybeans, $5 plus corn and 50 tonne per acre tomato crops in southwestern Ontario which are much more common than they used to be. The difference with regard to those prices from 1995 to what we have this year is more than dollars and cents. Our grain world has really changed and as we careen into 2011 we should all reflect on what we know and don’t know about our 2011 agricultural world.
The buzzword of the last few days in the grain markets has been rebalancing. The funds have always made the commodity market that much more volatile because of the huge infusions of capital they invest. Yes, I have documented before how the increased speculative contract limits of Chicago encouraged this type of trading. So every month, or every quarter or whenever they see an opportunity, the many different speculative funds rebalance. That leads to a very choppy volatile futures trade and giving everybody in farm country a bit of an ulcer.
Of course when you have a major USDA report coming up like we have on January 12th, market action reflects those funds positioning themselves in front of a USDA surprise. For instance, if the USDA repeats their January behavior of last year we can expect a huge drop in the market on January 12th. Last year that drop in the market took about eight months to reverse. It is a new day in the market every day so we cannot meet a judgment based on that but it is certainly in the back of my mind.
The numbers I will be focusing on Tuesday morning will be the size of both US corn and soybean crops. The USDA may find more corn and more soybeans, which will spook the funds and you know the rest of the story. However, it may be the demand figures that give us better clues on where this crop is going. Ending stocks will tell the story of whether higher prices have affected demand. Corn ending stocks are half what they were a year ago. Soybean ending stocks are about the same as what they were a year ago. If those stocks shrink further it will give confidence back to the re-balancing funds.
That of course is the short-term view. Everybody has an opinion about it but the long-term view may be more important in 2011. It’s pretty clear that we cannot continue with shrinking ending stocks, as we would run out of grain. Some analysts are saying that we need 5 to 8 million more acres planted this coming spring to satisfy demand. Combine this with robust demand from Asia and a few production problems in South America and the bullish view just grows longer. We need to keep this in mind as we plan toward spring. Sure, the funds could take us somewhere we don’t want to go in the grain market but the fundamentals of grain at the end of the day are very strong.
In Canada we’ll likely see a big boost in crop acres for 2011 in the western provinces. What are the chances of having that much rain in the spring once again in 2011? At the same time in 2011 governments will be reigning in spending and I expect cuts across the board in both federal and provincial agricultural spending. This will mean that the business risk management pillars of present-day agricultural policy will likely become even weaker. With prices very high at least for the short-term that won’t make a lot of difference.
Wheat may also surely surprise in 2011. We have the Russian export ban still in effect. We also have lots of American wheat currently exposed to severe winter chill. That is enough to put the risk chill into the wheat complex for at least another four months.
So as we look into 2011, let’s start next Tuesday when the USDA sets the tone. There are a plethora of bullish market factors just yelling out for an audience. 2011 should be fun. We’ll see if the USDA spoils the party.