David Hightower of the Hightower Report speaks at the 2016 Global Grain Conference in Geneva, Switzerland, about the world’s grain and oilseed supply and demand situation.
Hightower started with a look at the soybean market, noting that the world has a huge crop with big yields. Funds are still record long for soybeans.
“If there’s one thing you come away with from my speech today it is that the market knows that the supply is there,” he said. “The market has put the supply at a very high level. The question remains: Can we go the next 12 months and live up to those high expectations?”
The countries of Southeast Asia will play a growing role, Hightower said.
“We had China, we had India, and now we are going to have Southeast Asia,” he noted.
Grain imports to feed the area’s 665 million population are growing at 12% a year.
“Demand from this larger area and supply from this area, as we’ve seen from palm production, has now become important in the grain markets,” he said.
A second factor is higher equilibrium crude oil pricing.
“The headlines say, from the talking heads in the press, that world oil demand growth is slowing,” he said. “Well yes, oil demand growth is slowing, but each year we have an overall new record in oil consumption globally.”
The world economy has been in what he called “a rampant deflationary view.”
“There have not been many periods in history in which the equity markets so outperformed commodities for such an extended period of time,” he said. “Now we’re looking at valuations in terms of equity prices and we’re getting closer to the period of raising interest rates, and equity prices don’t do well historically in the face of rising rates. Commodities may come back to favor and vogue.”
The emphasis for grain prices now is shifting onto South American weather.
“Record production temporarily brings about record supply, but the emphasis is on ‘temporary’ because we can start the year with this fear about how high supply is going to be, and that is eroded and detracted from because of demand, because of above expected demand, and then occasionally we will get a surprise weather supply event,” he said.
He used base metals as an example of how commodities prices are trending upwards.
“Prices are headed higher even without that speculative element,” he said. “The investment funds are now finding their way into these very cheap commodities. Also, we have an incrementally better growth than we had last year. We are now beginning to see rampant deflation leaving the equation. We are going to see negative interest rates go away. We are going to see the U.S. rates notched higher. We are going to see that Southeast Asia impact.”
Market lows on the horizon
“Talking to the animal sciences head in China, he told me that demand for feed in China will not go down unless there is a major disease in the herd," Hightower said.
At the time of his presentation, Hightower believed the grain markets would reach a major low in the next 60 days.
“How does that low come about? Well, we raised our ending stocks projection because of what we are producing in the U.S. this year,” he said. “We’re done with the U.S. primarily and we’re already looking straight to South America. We’re already seeing an improvement. The areas that were dry have become wetter. The areas that were wet have become drier. The amount of production that is anticipated is large.”
He focused on the effect of the hog herd.
“In China that’s a very important issue,” he said. “Talking to the animal sciences head in China, he told me that demand for feed in China will not go down unless there is a major disease in the herd. But now we’ve developed vaccines and the animal husbandry that has taken place is reducing the threat of these kinds of fluctuations in the hog herd. We also have this major other negative view in that India has huge wheat stocks, that China has huge corn stocks. We don’t know how big they are. They don’t say how big they are. They don’t say how poor quality they are and they don’t say how the quality levels are deteriorating. That’s an important issue.
“Think of this: record U.S. supply, record U.S. ending stocks, more acres in South America, favorable weather to start the cycle and huge stocks in large consuming countries. That’s the bear’s best shot. In the last five weeks the soybean market has rallied aggressively. It confounds a lot of market participants that it has been able to do that. The fact of the matter is that the world sees those prices as value.
“Granted, the funds have been a major buyer of the soybean market over the last few months. Granted, the funds in soybean oil are recently at a record. The funds are aware of what they perceive to be a low value and an equilibrium price for those commodities.”
Hightower stressed that it’s not important where the demand comes from.
“It’s a world market,” he said. “It’s a world balance sheet. ... So when someone says ‘those exports went somewhere besides the U.S., when we’re in the U.S. markets,’ when you’re in South America and they say ‘we’re losing exports to the U.S.,’ I say it doesn’t matter. It may matter today, but it still is demand and it still eats through the supply in the world. We may have another letdown here. The funds are still long. They’re record long in soybean oil. That’s the heart of the matter, people. It’s not about soybeans. It’s about soybean oil. It’s about palm oil.
“We’ve now seen a record supply and the market was not under pressure, but the market will come under pressure off of the South American situation into the U.S. We’re going to see, in the next 60 to 90 days, the low for the next 24 months.”
Southeast Asia imports rising
Southeast Asia’s imports are starting to rise.
“Production is going higher and higher, it has to,” he said. “So the best thing to look at in my estimation is the stocks-to-usage ratio. How fast are we going through what we have? This balance sheet is in a constant state of flux and what I’m telling you is that we start out each year, when we’re in an oversupply situation, with a large number and it ends up being smaller. If we don’t get those upper-end yields, we have completely changed the complexion of the grain market like that. South America might have something to say about that, but think of this: If we don’t carry out as much supply as we thought, then the amount of impact from South America is reduced. We can weather a higher amount of output without much problem from South America because we have changed the overall balance sheet.”
Southeast Asia’s imports are starting to rise.
“The per capita consumption is going to continue to rise,” he said. “The minor incremental change in standard of living will be channeled into better diet. From a subsistence standpoint in Southeast Asia, you move from an aquatic seafood diet, to a processed diet, to a meat and protein diet. So that transformation has been in motion for a substantial period of time and cannot be understated.”
He predicted greater volatility, despite greater crop production.
“You have to understand it’s going to be more commonplace, more volatile going forward,” he said. “Last year we did have problems in South America, but these problems were not that significant in soybeans. They were a little more significant in the corn market. That shows you that we may be hit a little in prices, but the volatility going into 2017 is going to be fairly high. Now some people would suggest, with a high absolute number of tonnage out there, that the volatility would be less, but history tells us that is not the case.
“We have so many agricultural supply threats just in sheer number that it is going to be difficult for us to get to a significant balanced and oversupply situation. I can’t emphasize enough how you need to be strategic. Always be protected because the market is going to be volatile. There may be one additional chance in the next 60 to 90 days, if you’re a buy-side person, that you can step in and get a cheap price. Other than that, grain prices probably cannot stay at these low levels. And if there’s a problem in Brazil, a problem in palm oil, or a problem next year, then the amount of reaction in prices could be rather significant. So if you’re a buyer it could be a good year, if you’re a seller then later on in the year it could be a good year. So everyone should be happy, but keep in mind it’s a big world and the commodity markets are small. And we need everything that we can get.”