2015 price outlook

THREE AMERICAN ANALYSTS OFFER OPINIONS

AS OF MID-NOVEMBER, the United States Department of Agriculture’s (USDA’s) Economic Research Service projected a 2014/2015 corn price at the farm gate of $3.20 to $3.80 per bushel (U.S.) and a soybean price of $9 to $11 per bushel. But do analysts agree?

Arlan Suderman, Water Street Solutions senior market analyst, sees South America as key to 2015 price prospects for North American grain farmers.

“We’ve built a very healthy surplus of corn and soybeans in the United States and an ample supply of wheat,” he says. “If South America harvests a big crop over the next 60 to 90 days, that adds to the surplus. The market has shown it’s very comfortable with just-in-time supply, so it would be comfortable taking prices to new lows.”

However, if adverse weather shortens South America’s production outlook, prices could quickly rebound above the 2014 fall bounce.
 
“We’re walking a fine line. If they have a good crop, both corn and soybeans could be pushing lower, trying to discourage production and encourage demand, so we have weak prices going into planting. Then it comes down to growing season weather,” he says.

With strong global demand for both corn and soybeans, a production threat on either side of the Equator could quickly take prices to levels above 2014, “but if we don’t see that threat, then we’re probably looking at new lows,” Suderman predicts.

“Producers need to protect the equity they’ve built over the last six to eight years. An advisor can walk you through the best combination of forward cash sales, futures, and options for your farm. That’s going to vary, but the main thing is to have a strategy that protects you from down-side price risk but leaves flexibility to take advantage of unexpected rallies.”

Longer term, Suderman thinks soybeans will lead in providing direction. “The general expectation is a shift in North America from corn to soybeans; but if South America has a big soybean crop, then the market will try to discourage that shift by removing soybeans’ price advantage and that will probably pull corn down too,” he concludes.

BALANCE SHEETS
For his price analysis, David Kruse, CommStock Investments, looks first at the growing carryover in corn and soybean balance sheets.

“A year ago we had something over 1.2 billion bushels (bbu) of corn and after 2014 the USDA says we’ll be near two bbu. Even if we pull back on acres in 2015 and have slightly less yield, we will continue to grow the carryover. And that’s generally negative for prices,” he says. “In soybeans, we’re coming off very tight stocks from the previous year, but that’s been buffered with a record U.S. crop. We’re seeing the carryover go from 92 million bushels (mbu) to 450 mbu, which is pretty astounding — and it’s not price friendly in the long term.”

On the weather front, Kruse notes the El Niño influence. “We’ve never had below trend-line crops in the U.S. in an El Niño year. Here in Iowa, we depend significantly on our subsoil moisture to get through dry periods in the summer, and this year we’re fully recharged with 12 inches of water in our soils, so that will help us. We see year- to-year increases in carryover and 2015 should be a good production year.”
 
Kruse says price opportunity will depend on how demand responds. One concern is the strong U.S. dollar, which makes grain from Russia, Ukraine, Brazil, and other countries more competitive.

“There will be growing demand — but how much of it will we get?” he asks. 
   
The result is a guarded price outlook. “We’re looking at 2015 new crop corn futures at $4.27 per bushel (as of mid-November) and new crop soybeans at about $10.35, and both of those I think are higher levels than what they’re likely to be at harvest in 2015,” Kruse says. “You have to take advantage of hedging. It’s a combination of that and crop insurance, and here in the States we have revenue insurance, but we may even have to fall back on farm program subsidy payments until the situation changes.”

PATTERNS
Ed Usset, marketing specialist at the University of Minnesota’s Center for Farm Financial Management, thinks the outlook for a large commodity price rise in the first half of 2015 is small.

He bases that on the track record of previous years when, as in 2014, the USDA’s September estimates showed ending stocks increasing by more than two weeks of usage. The 2014 increase — from 4.5 weeks to 10.2 weeks for corn and from 2.0 weeks to 6.9 weeks for soybeans — is the largest since 1990. Usset found similar patterns for corn in six years since then for corn and in four years for soybeans.

Countering the typical tendency for cash prices to rise from October to May, in half of those comparison years, crop prices were lower in May than at harvest, and only two years showed robust gains. A similar “grim analysis” holds for wheat prices, as USDA predicts a rise in ending stocks from 12.6 weeks of use to 17.4 weeks.
   
Usset also notes a shortage of large cash price gains (more than 10%) that might spark the kind of strong market producers saw when China bought large amounts of corn in 1994/1995.
   
Advice to “store grain and wait for higher prices” can work in a typical year, but Usset warns that 2014/2015 is not typical. “If you must store grain, sell the carry and hope for better pricing opportunities for the 2015 crop,” he recommends. •