Bearish forecast for grain market
by Chris Lyddon
Dan Basse, president of AgResource Company, took a bearish view of the near future for world grains at the recent Cereal Europe 2014 Conference in Geneva, Switzerland. It would take a severe dislocation to supplies, presumably caused by adverse weather, to create a lasting bull market.
He described three bearish factors in world grain trading.
“Number one, the world biofuel boom is now mature, particularly in the United States. Number two, high prices and thinning demand is leading to stagnation of world meat consumption. And lastly, the U.S. export share is the lowest that I can find on record for a non-drought year,” he said. “If the United States produces a good crop and the world produces a good grain crop this year, what is going to happen? The United States has got to buy its way back into the global grain market with a lower price.
“We believe that the commodity plateau theory really holds water. Commodity prices trade sideways over a long period of time and then we have an event that really ramps it up. So are you going to tell me that there is a lasting bull market in the commodities that we deal: corn, wheat and soybeans? I believe we need a supply dislocation due to adverse weather, and major drought somewhere in a major producer if we are going to see this rally continue. We believe that there is going to be a bearish trend that will last into 2016.”
He stressed the importance of fracking for energy in the United States. “We believe that United States will be energy self-sufficient by 2020,” he said. “This is a really big deal. This is one of the reasons why the global equity markets and the U.S. stock market are at record highs.”
He considered the tight U.S. oilseed market. “The world has plenty of oilseeds. The problem is they are not in the United States,” he said.
Chinese crush margins have collapsed. “China has a case of what I would call supply indigestion. They have that problem with avian flu, diminished feed consumption and somewhat of a slowing economic profile.”
In the U.S., transportation has risen in price. “Railcar rates in the United States have reached up to $4,000 a car,” he said. “We couldn’t get the rail cars in a position that we needed to and there was a shortage of supply.”
That is because of the boom in fracking. “Fracking requires lots of sand and water. A lot of those railcars were tied up doing fracking opportunities in North Dakota. The thing my hedge fund clients are talking about now is the price of the species,” he said. “Cattle and hog prices in the United States are record high. They are rising in other parts of the world also. The reason being that ethanol for the last seven years has kept grain prices relatively high.”
“During that time we have liquidated the U.S. cow herd to the lowest level since 1947,” he said. “If you don’t have cows, you don’t have feeder cattle and you don’t have fat cattle.”
The hog herd is also affected by the disease PED (Porcine Epidemic Diarrhea virus). “We believe that we lost, in January, 1.2 to 1.3 million hogs due to this virus,” he said. “What we produce is fed to livestock.”
Per capita food consumption retains the potential to have a bullish impact.
“Everybody wants to eat like a European,” he said, meaning 3,000 to 3,500 calories per day. “I would argue that may be 500 to 1,000 calories too many, but that’s what we consume.”
“This has been part of the bull market in agriculture. At the same time as we have had this rising caloric intake we have the Federal Reserve Bank in Washington printing lots of lots of money trying to reflate everything. Notice that balance sheet now in the U.S. has expanded and we are still putting $55 billion a month into this up to approximately $4.3 trillion. This is a new experiment.”
U.S. moves to take away some of the stimulus had resulted in a response from some world currencies that he described as “rather dramatic,” including the Indian rupee, the Russian ruble, the Brazilian real, and the Argentinian peso.
“When the taper started in December and we started to hear rumors of a taper in May, the currency contagion started. If I look back and we look at, let’s say, the price of soybeans in Argentinian pesos or in Brazilian reals, notice that for a lot of South American farmers the price for their grains is at or near record highs,” he said. “It’s a good time to be a Brazilian farmer. It’s a great time to be an Argentinean farmer if you can convert it into dollars.”
Basse said Chinese wheat production is expected to reach up to about 126 million tonnes, which would be a new record.
“Everything we hear from Chinese wheat areas is generally favorable. Notice how many years in a row that the Chinese have had very good crops going back to 2003. In the case of Chinese wheat imports, we expect the Chinese to take about 3 million tonnes in the year ahead, much different than the 8.5 million tonnes that were advertised this year.”
He suggested that China’s unwillingness to accept the maize variety MIR 162, which is accepted by the E.U., might have something to do with the country’s huge maize stocks, which he put at 71 million tonnes this year.
“Maybe phytosanitary is being used for trade or political means because they have got more than enough corn already,” he said. “We all have to guess when MIR 162 will be accepted is when the Chinese corn market starts to move up.”
Basse said he expected India to remain a significant wheat exporter.
“The Indian wheat crop is projected at or slightly below 100 million tonnes – a big wheat crop,” he said. “Next year I would have no problem talking about exports of 6.5 or 7 million tonnes. The Indians have the wheat. It’s a question of availability and getting it through port.”
NEW CROP FORECASTS
For the new season, AgResource is forecasting a record world grain area of 449 million hectares, with a record for maize of 179.5 million.
“We are forecasting record wheat and corn production,” he said. “World corn production is projected at 978.4 (million tonnes) and on wheat we are projecting 713.8. If you look at crop size, we are up about 1.1 million tonnes on wheat from last year and on corn about 11 million tonnes. A lot of that corn is coming from expansion in acres in other places outside the United States.”
World corn and soybean demand has been at an all-time high the last year, he said.
“We are forecasting as big growth in the year ahead. A lot of that is what we call pipeline refilling. This is a big global grain restocking. If I look back, there is nothing that compares to it,” Basse said.
“The United States is taking up a much bigger share of global corn trade. Ukraine has also expanded its corn trade. It is really the United States and Ukraine combined which has given us that big bump in global corn trade.”
Corn prices got too cheap, he said, and global demand really took a sizeable increase to the upside. “In January, we saw we had a larger feed residual, smaller stocks in the United States. That’s when the corn market started to react to the upside. We are forecasting this year that global corn, wheat and soy stocks will be near a record.”
“The hedge funds that have bought it, they are long right now. They are long a lot. All of a sudden when we start to talk about record global grain stocks, I imagine these buyers will turn into sellers. But it’s not going to be an easy transition. We are going to have to get them to understand the supply pressures that will be forthcoming.”
Biofuels are being hit by a change in consumer behavior. “U.S. consumers have decided to become more energy-efficient,” he said. “We are finding people are shifting towards more efficient automobiles. Today we are looking at the United States consuming about 132 billion gallons of gasoline, 10% of that gasoline can be blended with ethanol. Instead of being what was projected, 15 billion gallons of ethanol, we now are talking about a need for 13 to 13.5 billion gallons of ethanol. We no longer need more and more acres of corn going forward.”
In the United States, per capita meat consumption is declining, he said. Since 2006, the U.S. has lost approximately 18 pounds per person. He suggested it is because more Americans are entering what he called the metallic age.
“In 2020, 16% of the U.S. population will be over 65 years of age. You all know what the metallic age is, right? It is when you get silver in your hair, gold in your teeth and lead everywhere else. That means that your doctor and my doctor are telling us to eat about a third less of what is on our plate,” he said. “I don’t need the same kind of calories.”
“World trade this year in corn, beef and soy has turned up dramatically, but notice that the trade has shifted,” he said. “We now see global trade more centered on places, in the case of corn, like Latin America and the Black Sea.”
Non-U.S. corn production is a record 63% of the total.
“The build-out of the U.S. ethanol industry and high prices for many, many years have caused corn to be grown in non-traditional areas around the world,” he said. “We have now created a new class of countries called the ABUs -- Argentina, Brazil and Ukraine. A year ago they had 65% of global corn trade. This year we are expecting it to be somewhere around 60%.”