Market Matters Blog

A Demand Optimist

Analyst David Hightower thinks the next two months will be ugly for the corn and soybean markets, but he's a little more optimistic about six-month timeframe. He also stressed that the low in the corn market will come before the low in the bean market. He thinks demand will be stronger than people think.

"Make no mistake about it. Soybeans may have an additional dollar on the downside. Corn may have 30 or 40 cents on the downside." That's what the fundamentals would dictate, he said, adding that "in this day in age, we can get a pile up. We can have a combination of internal and external information and developments that can weigh on prices or exaggerate prices on the upside.

"Supply is starting to feel the pinch already, but the market doesn't care about that yet," he told attendees at the U.S. Soy Global Trade Exchange conference. The market's current focus is on how much oversupply of corn the U.S. will have after harvest.

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"We are very close to the period of high supply in the corn market, and that's why I'm projecting that in the next two to three months we may find the end of the downdraft in corn prices," Hightower said. "We've already seen that Argentina, Venezuela and maybe Brazil are going to be reducing their corn acres by 10%. We also know that the Ukraine is the third largest exporter of corn. As we come around next year to the planting of that crop, credit will be extremely difficult to come by."

He said he thinks corn prices have another 30 to 40 cents of downside risk. He expects a couple of things to happen around the time prices reach that bottom point. He thinks speculative investors will reach and exceed a net short position of 70,000 contracts, China will record large single-increment purchases and that ethanol exports will take off dramatically in the December to February timeframe.

It will take a while longer to see the low in soybeans, he said. Crop conditions didn't deteriorate in August like they normally do, and "what I fear that more than anything is a surprise report that really puts up ending stocks."

While beans could see their period of highest domestic supply in the next three to five weeks, the low isn't going to come in before more is known about actual South American production. USDA recently revised its new-crop bean planting upwards for Brazil and Argentina, and some private estimates have even come in higher. He thinks the soybean market low, which he puts at $8.50 to $9 per bushel, won't be seen until early 2015, and that's only if there are no major hiccups with South American planting.

"There is some long term value at the $9 level," he said. With bean prices in that realm, oil prices would drop to the 25 to 30 cent per pound range, a profitable level for biodiesel production. Several conference attendees pointed out that biodiesel demand will help absorb large supplies of cheap soybean oil, but won't do much to increase demand. Instead, it's more likely to help hold up the floor.

Hightower argued that another substitution may take place. Soybean meal could displace fish meal in aquaculture rations. Global demand for beef, pork and poultry continues to climb, a large factor in soybean demand's continuous growth over the last decade.

"Tte energy function is as strong as ever," he said. "I just don't understand why 2015 will be any different than the last ten years. It's still going to be the same thing: You've got to have a lot of production, and you've got to be able to get it from where you have it to where the world need it, or it's going to cause a commodity crunch."

(CZ/SK)

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Raymond Simpkins
9/23/2014 | 11:23 AM CDT
The auction pages will be full of ads. this winter.
Don Thompson
9/22/2014 | 10:03 AM CDT
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