March 14, 2005
WHAT WILL WE THINK OF CURRENT CROP PRICES SIX MONTHS FROM NOW?
The recent rally in soybean, wheat, and
corn prices has been a bit of surprise, both in the timing
and the magnitude of the rally, particularly for soybeans.
Will this rally turn out to be a "bubble" or just
the beginning of a period of high prices?
Some perspective on supply and demand relationships might
be helpful in assessing the current rally. Beginning with
the 1998-99 marketing year and persisting through the 2003-04
marketing year, there appeared to be a shift in the underlying
supply/demand relationship for both corn and soybeans, compared
to the 1989-90 through 1997-98 marketing years. That shift
was expressed as a lower average marketing year farm price
for a given level of year ending stocks relative to marketing
year use. For example, during the period 1989-90 through 1997-98
a year ending stocks-to-use ratio of corn of 20 percent would
have been associated with a marketing year average price of
$2.25. In the latter period, a similar stocks-to-use ratio
was associated with an average price of about $1.85. For soybeans,
a stocks-to-use ratio of 10 percent in the early period was
associated with a price of about $6.10. In the latter period,
a similar ratio was associated with a price of about $4.75.
The shift described above has been clearly recognized, but
not fully explained. Part of the shift may have been associated
with the change of farm programs beginning with the 1996 crop.
With the elimination of acreage reduction programs, the market
may have experienced a downward shift in the demand for inventories.
Generally low rates of inflation, and even some concerns about
deflation, may have also reduced the speculative demand for
agricultural commodities. Some suggest that the shift may
have been associated with the rapid increase in South American
production. Whatever the reasons, the inability to fully explain
the shift resulted in the inability to judge if the shift
was permanent, to predict if the supply/demand relationship
might revert to that of the earlier period, or to predict
if the relationship might change in some other way.
The evidence of the 2004-05 marketing year for corn and soybeans
suggests that the relationship may have indeed shifted back
toward that of the earlier period. Perhaps the uncertainty
about future supplies, the inflation in other commodity prices,
or the lower valued dollar has increased the speculative demand
for crops and futures contracts. Based on the USDA's current
projections, the year ending stocks to use ratio for the 2004-095
marketing year for corn will be 19.2 percent. Using the relationship
in the earlier time period, that level of stocks would suggest
a marketing year average price of $2.26. The relationship
in the latter period would suggest a price of $1.88. The weighted
average price received from September 2004 through February
2005 was likely near $2.11. Based on closing futures prices
on March 11, the market is offering an average price of about
$2.18 for the rest of the year. So, if prices don't change
from now through August, the weighted average for the year
will be about $2.14. That average would be much closer to
$2.26 than $1.88.
The case of soybeans is even more dramatic. Current USDA
projections are for a year ending stocks to use ratio of 14.4
percent. Using the relationships identified from 1989-90 through
1997-98, that ratio would suggest a marketing year average
price of $5.67 per bushel. The relationship in the more recent
time period would suggest a marketing year average price of
$4.14. The weighted average during the first six months of
the year was about $5.54. Closing futures prices on March
11, reflected an average cash price for the last six months
of the year of about $6.45. If prices remained unchanged for
the rest of the marketing year, the weighted average price
would be $5.78. Even based on the relationship of the earlier
time period, market fundamentals suggest that current soybean
prices are about $.40 too high.
For the 2005-06 crop year, a modest increase in corn acreage
and trend yield would likely result in a year ending stocks
to use ratio of 15.2 percent, suggesting an average price
of $2.35 using the relationship of 1989-90 through 1997-98
and a price of about $2.00 based on the latter time period.
Closing futures prices on March 11 pointed to a 2005-06 marketing
year average farm price of $2.34. Unless consumption grows
more rapidly than expected or the 2005 yield drops below trend,
new crop corn prices appear to be high enough, if not a little
For soybeans, a trend yield and a modest decline in acreage
would trim the 2005-06 year ending stocks- to-use ratio to
about 13.4 percent. That ratio would suggest a 2005-06 average
farm price of $5.75 if supply/demand relationships have shifted
back to that of the earlier period and a price of only about
$4.25 based on the relationship of price and ending stocks
during the period 1990-99 through 2003-04. Closing futures
price on March 11 reflected an average cash price of $6.12.
Unless the prospective supply and demand balance tightens
significantly, current new crop futures prices appear to be
at least $.35 to $.40 too high.
The recent sharp rally in crop prices appeared to be triggered
by a late season drought in southern Brazil, but has reportedly
been fueled by a large flow of speculative funds buying crop
futures. A continuation of that pattern could push prices
even higher. However, the rally already appears to be overdone
unless the U.S. growing season results in yields several bushels
below trend value.
Issued by Darrel Good
University of Illinois