Posted by: usset001 | April 3, 2010

Are historical grain price trends still relevant?

I received an interesting question/comment from a grain producer, and I thought you might enjoy reading his comments and my response.

I’ve noticed that you reference historical trends from approximately 1990 to today, and time sales to coincide with those trends. Do you think historical data older than the last few years has value in today’s market place? My reason for asking is the markets have been so atypical and volatile since the advent of ethanol production and the increased impact of South American production. “Old” patterns do not seem to hold, and including older data may dilute the current trends. [During] the last few years, the “pre-river opening” period has not been a good time to market corn, while in years past it seemed like the preferred time.

I think the historical trends we follow are still relevant today, because these trends are rooted in the grain production cycle (spring planting, summer growth and fall harvest). Having said that, it is helpful to remind ourselves that seasonal price patterns in cash and futures prices represent tendencies and not certainties. This year is a case in point. I wrote in my April Corn & Soybean Digest column that since 1990, there has been only one year (1996/97) when the cash prices of corn and soybeans were lower in May than in the previous October. Barring an incredible price recovery in the next 8 weeks, this will be another one of those years. Does this mean the world has changed? No. It simply means that what we view as “normal” is a tendency and not a certainty.

The production cycle remains unchanged, but you make a great point in noting some important structural changes in the grain industry, notably the emergence of South America as a major soybean producer and the advent of the age of ethanol. Concerning South America, I offer two thoughts. First, the emergence of South American oilseed and grain production was not a sudden event – we saw this train thundering down the tracks more than two decades ago. We can be impressed by the growth in the Southern Hemisphere, but we cannot be surprised. Second, if I were asked 20 years ago to predict the impact of an emerging oilseed export competitor in the Southern Hemisphere – with a production cycle the opposite of ours (Feb/Mar harvest) – I would have predicted a moderation in the seasonal price patterns for soybeans in the United States. In other words, I would have predicted that the “normal” rise in cash soybean prices from harvest to spring would be less today, due to the ready availability of soybeans to the rest of the world from South America, starting in February. If you look at the record, the exact opposite has occurred. The average rise in U.S. soybean prices from harvest to spring has been higher in the past two decades than ever before. Go figure.

Concerning ethanol, the rapid growth of this industry may explain your perception of the “pre-river opening” period losing its status as a good time to price corn. The ethanol industry has added an incredibly  large block of demand for domestic corn and, like feed demand, this demand is steady throughout the year. The river opening is all about export demand, and export sales become more attractive to buyers with the availability of lower barge rate economics. Let’s put some numbers to this. Over the last 35 years, U.S. corn exports have been relatively stable: we exported 1.7-2.3 billion bushels in all but a handful of years. In 1978, for example, we exported 2.1  of the 7.3 billion bushels of corn produced – we exported nearly 30% of the entire corn crop. This year, we will again export about 2.1 billion bushels, but this represents just 16% of our total production. Clearly, the opening of the river and the prospect of modestly higher exports is losing its impact on prices.


Responses

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