By Matt Reese
As 2012 comes to a close, grain marketers find themselves in a similar position as the same time last year with a crop on the short side and strong prices. Thus, Ohio State University Extension economist Matt Roberts had a familiar message for crop producers at the 2012 Ohio Grain Farmers Symposium compared to the event last year: there is a significant risk of falling prices in the upcoming growing season. Roberts is quick to point out, though, that those who did not listen to his advice last year were much better off than those who did.
The drought made the difference in what was yet another below trend line yield year in 2012. The USDA has forecasted that corn production this year will drop to its lowest point since 2006 as a result of historic nationwide drought.
Roberts’ presentation covered how the drought has impacted yields and what that means for growers in 2013. While the drought had massive impacts in the fields, the higher prices and crop insurance offset yield losses for growers, Roberts said. With lower production, growers can also expect tighter supplies going into 2013, which will allow for higher basis levels in the spring and summer, with the difference between local cash prices and futures prices expected to be stronger, he said.
“We have very, very low corn inventories so there is less buffer stock for any sort of production interruption,” Roberts said.
The demand side continues to be strong for crops as well.
“Chinese meat consumption is rising quickly — especially pork. If you’re going to produce that many hogs you’ve got to be able to feed them. Chinese oilseed consumption has grown by 13% a year since 1990 and Chinese grain consumption has been growing by 4% per year since 2006,” Roberts said. “The real currency in agriculture is land. It is easy to talk about all of these different measures, but at the end of the day it all goes back to land. We have 50 million acres of additional demand from just two sources with China and U.S. ethanol. We need half an Ohio of new production every year to meet this demand.”
“If we have a normal growing season in 2013, there are lots of downside risks for prices. Prices at harvest will be lower than at planting. As a result, growers should market more aggressively,” Roberts said. “If we have a 14 billion bushel harvest we’re going to need to have lower prices to have a place for all of those bushels. If we would have a 157-bushel average, I don’t think it is unreasonable to expect $4.75 or $4.80 futures at harvest. I think we need a corn yield lower than 152 to keep prices in the $6 range.”
Key market factors in the coming months include the South American crops, exports, the ability for the domestic livestock industry to rebound from high feed prices, the dry U.S. wheat acres and, of course, the weather. Corn, soybeans and wheat need acres. The only crop that has acres to give is cotton.
There is a potentially very tight supply situation coming. The reality is that everybody wants calls and they are expensive. Crop insurance may be the best tool for protecting corn profitability from downside risk. Roberts thinks that there will be great opportunities for basis with corn through next summer.
“As long as you are not expecting 2013 to be droughty, prices will probably go down. If there is another drought in 2013, prices will be strong,” he said. “When you are coming off a below trend year, chances are the following year will have lower prices.”
But that, of course, was what Roberts said last year.
The Ohio Ag Net’s Ty Higgins was also there and collected interviews with some of the Symposium’s speakers. Find them here.