Tuesday, January 15, 2013

Are We In For Another Year of Drought And Spiking Crop Prices?

First, consider the following chart:

Also consider this chart of the US drought monitor:

Now, consider the these increased temperatures in conjunction with these lowered crop estimates:

USDA’s lowered 2012/13 domestic ending stocks estimates for corn and wheat, anticipating solid demand.

U.S. wheat ending stocks are seen at 716 million bushels, compared to 754 million a month ago and 743 million a year ago, raising projections for seed, and feed and residual use. Estimates ranged from 637 million to 792 million bushels, for an average of 743 million. The average farm price is estimated at $7.65 to $8.15 per bushel, compared to December’s range of $7.70 to $8.30.

Domestic corn ending stocks are expected to be 602 million bushels, compared to 647 million last month and 989 million last year, due to an increased feed and residual use guess cancelling out a larger crop estimate and a lowered export projection. Before the report, the average guess was 667 million bushels, in a range of 489 million to 764 million. The average farm price is estimated at $6.80 to $8.00 per bushel, unchanged from December.

U.S. soybean ending stocks came out at 135 million bushels, up from the 130 million in December but down from the 169 million from this time last year. Analysts’ projections ran from 107 million to 178 million bushels, for an average of 135 million. That’s with USDA raising last year’s production total, cancelling out increased expectations for crush and residual use. The average farm price is estimated at $13.50 to $15.00 per bushel, compared to December’s range of $13.55 to $15.55.

Wheat stocks estimates dropped by 38 million bushels.  Corn stocks dropped by 45 million bushels over the last month and are down from 989 million bushels last year.  Soy bean estimates did increase from levels earlier this year, but are also down from last year's levels.

Finally, let's place all of this data in context by looking at some long (25 year) price charts.

Corn spend the better part of 20 years (1988-2006) trading between roughly 1.75 and 3.50, with one price spike in early 1996.  However, starting in mid 2006 prices spiked sharply, trading between 3.00 and 8.00.  Also of important is the sharp, upward sloping trendline starting in mid 2010 which supports prices moving from the 3.50 level to the current 7.06 price.

Spy beans spend a long time trading between 4.00 and 8.00 a bushell.  However, prices now have a sharp uptrend that is carrying them from into the 12.00 and 16.00 range.

Like corn and soy beans, wheat spent nearly 20 years trading in a disciplined level -- roughly 2.00-5.00 a bushel.  Prices consolidated in a symmetrical triangle between 2006 and 2012.  They broke through upside resistance during last year's drought.  Prices have moved lower, but they are still above the top symmetrical triangle trend line.

So, we have

1.) Increasing temperatures,
2.) Declining estimates and actual crop inventories, and
3.) Already spiking long term (25 year) price charts.

This year could be another roller coaster ride for crop prices.