by Katie Micik, DTN Markets Editor
OMAHA (DTN) — Corn, soybean and wheat prices are expected to strengthen through the first quarter of 2013 and then trend lower through the rest of the year as global production rebounds, several banks stated in recent agricultural commodity outlooks.
“Agricultural markets are faced with the challenge of rebuilding global stocks next season given precariously balanced fundamentals,” stated the opening line of Rabobank's report “Outlook 2013 — Rebalancing on a Tightrope.” “In order to achieve a build in stock levels in 2013, we expect prices — particularly in grain and oilseed markets — will need to move higher in Q1 to slow demand from its current pace.”
Those higher prices will encourage increased global production, leading to softer prices in the second half of 2013. Rabobank expects rebounding production to generate small global surpluses of grain, but overall tight supplies will leave the market vulnerable to production setbacks.
But the ag lender also noted that macroeconomic issues are casting a cloud over the outlook for agricultural commodities.
“Weak global economic growth and continued macro uncertainty may cause a slight drag on demand for agricultural commodities in 2013,” said Luke Chandler, global head of Rabobank's Agri Commodity Markets Research (ACMR) department. “However, a low U.S. dollar will provide support for prices.
“Speculative money flows will also remain very sensitive to macro uncertainties, with the risk-on/risk-off trading pattern of 2012 likely to continue. Using the S&P Agri Index as a proxy for our commodity forecasts, we expect a decline in agricultural prices of around 10{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} in 2013.”
Chris Narayanan, head of agriculture commodities research for investment bank Societe Generale in New York City, told DTN many traders are focusing on taking profits and rebalancing portfolios in December.
“When you put all that together, it helps keep prices a little muted at this point,” Narayanan said. “Once we get past this, certainly after the new year starts, we'll start seeing more and more interest” in the ag commodity markets on Wall Street, particularly in wheat and soybeans.
CORN
Societe Generale forecasts corn prices to average $7.38 per bushel during the first quarter of the year before falling to an average of $6.57 during the fourth quarter, according to its 2013 outlook. The price forecast is the quarterly average of the nearby futures contract.
Rabobank's forecast is more favorable to farmers in the first three months of 2013 with corn prices estimated to average $7.90 per bushel, factoring in a rally in January following the USDA Grain Stocks report.
However, Rabobank expects corn prices to fall 24{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} over the course of the year to average $6 per bushel in the fourth quarter. The key factor in that price decline, the Rabobank report states, is the corn production estimate of 14.1 billion bushel. That figures in a 0.7-million-acre increase in corn plantings to 97.6 million acres, with increases coming in the Northern Plains, displacing soybeans and wheat, and the Delta, displacing cotton.
“Our base-case scenario shows stocks-to-use rising to 13.6{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05}, although we acknowledge significant risks to our return-to-trend yield forecast,” the report stated, noting current drought conditions. Rabobank used a trend yield of 157 bpa in its forecast.
“We see corn demand and prices pressured on reduced usage for ethanol, further reductions in the U.S. livestock and poultry sectors, and less exports,” according to Societe Generale's outlook. “However, prices are vulnerable to adequate South American production. If production there disappoints, prices will likely see upside risks to our current forecasts.”
SOYBEANS
Both banks view soybeans as being more bullish than current prices imply. Rabobank believes current price levels “underestimate production risks and that the price response to any downward production estimates (in South America) will be large.”
Narayanan said planting delays in South America have raised concerns that farmers will switch to short-season bean varieties, cutting yield potential.
“We're kind of in that place where, yeah, we can dig out of this hole but we need to see strong production coming out of both Argentina and Brazil,” he said.
Narayanan said he expects the biggest price jump in soybeans during 2013 to happen during the first quarter with prices averaging $15 to $15.50 per bushel. Then he expects prices to trend lower through the year, assuming there are no problems with the U.S. crop, putting the average fourth-quarter price closer to $13.80.
Rabobank expects first quarter soybean prices to average $14.75 per bushel, decreasing when South America's crop hits the global market. By the fourth quarter, the bank expects prices will average $13 per bushel.
China's import demand is expected to grow 6{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} year over year for 2012/13 and 7{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} in 2013/14. China's desire to remain self-sufficient in meat production and control food inflation will likely keep them in the market, and Rabobank believes “this strong demand combined with the drawdown in strategic reserves will likely drive higher imports in 2013, with prices being less of a determinant.”
WHEAT
Wheat prices are expected to follow the same pattern as corn and soybeans, but Rabobank and Societe Generale differ on just how much prices will change.
Rabobank estimates first-quarter CBOT wheat prices at $9.10 per bushel, dropping to $7.75 in the second quarter and $7 per bushel in the fourth. First quarter prices get a spillover boost from corn but prices fall as North America harvests its winter wheat crop.
Any supply shock in 2013 could have a large impact on prices, Rabobank estimates, as the major wheat-exporting regions are forecast to have the tightest stocks-to-use ratio on record, 11.3{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05}. Rabobank thinks downside volatility is enhanced given investors hold a net-long position of 48,431 contracts, well above the historical average of 10,374. “Our forecast stocks-to-use in major exporting countries, up 3.9 points to 15.2{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} in 2013/14, highlights the risk of speculator liquidation as fundamentals turn bearish.”
Yet Societe Generale's Narayanan said production concerns in Australia, Argentina and the Black Sea region have attracted traders' interest. “It's just like what we saw in 2010. When you have multiple areas having problems at the same time, people start paying attention to wheat again.”
He sees wheat prices averaging just shy of $9 per bushel during the first three months of 2013, falling only to about $7.95 per bushel at the end of the year, about $1 more than Rabobank estimates.
“I think people are starting to realize the Black Sea is not going to retain their 'origin of choice' status going forward,” Narayanan said. “Eventually the economics will take over. If they put an export ban in that'll just quicken the process, but by and large we're starting to see world wheat prices converging.”
In the meantime, the U.S. winter wheat crop is drought stressed going into dormancy, and current forecasts suggest it will break dormancy under drought conditions.
Investment traders will likely to start looking for new places to put their money after Jan. 1, and “if this thing continues I think it just offers them more of a buying opportunity ahead of the drought,” Narayanan said. “And then we'll have to see what happens with the new crop later this year.”
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Posted with DTN Permission by Haylie Shipp
