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Where in the world are grain prices headed?

For many years I've listened to producers talk about markets going to a “new plateau” almost every time grain prices rallied. It never happened, of course. But this time, I would have to admit that the new plateau theory is for real. The world has definitely changed.

The world of agriculture has been jolted by two enormous fundamental changes within the last two years that we have not faced before. The first is the ethanol industry and the amount of corn it will be using and the second, of course, is China.

The modernization of China is having much more impact on the world than many had expected. In the last two years the Chinese stock market has nearly doubled in value. This has created enormous amounts of wealth and buying power — for “things” and for food. The diet in China has been improving rapidly and once that trend begins, they will not go backwards.

An accompanying chart showing China's increasing demand for oilseeds speaks for itself. The line is straight up.

The bull and ethanol

This news is nothing shocking or new to any of you. The chart on corn usage for ethanol also speaks for itself. Thus far, however, production is keeping up with this demand. Ethanol demand, however, creates a stable and long-term increase in demand and is not going to go away.

Add to these two fundamental changes two other ingredients that have been adding fuel to the fire of this bull market in corn and soybeans. Crude oil prices, as I write this, are over $90 a barrel. This is inflationary and supported for ethanol prices.

More importantly, however, is the influence of Index Funds (the funds that can only buy). Billions of dollars have flown into these funds in the last couple of years. The Goldman Sachs fund, the biggest of all, exceeded $100 billion dollars a couple of months ago. Of that amount, 8.2 percent is invested in the grain market. That's $8.2 billion dollars of buying power for corn, soybeans and wheat. That creates an artificial demand that the market has never experienced.

Keep head attached

It is easy to get overenthusiastic with all of this bullish news. But as in any market, what price levels do these new bullish fundamentals justify? Does this demand mean we have a shortage of $3 corn? $4 corn? $5 corn? Do we have a shortage of $9 beans? $10 beans? $12 beans? $15 beans?

It is clear the market near-term has a shortage of $4 corn and a shortage of $10 soybeans. Within the next six months, my guess is we'll realize the market does not have a shortage of $4.50 corn nor does it have a shortage of $13 soybeans. We will likely have a surplus of those two varieties.

Somewhere in between, these markets will find a happy medium. This is new territory for everyone in the price forecasting business. Consequently, it is my feeling you should be basing marketing decisions upon the profitability of your farm and not entirely upon where you think this market is headed. No one knows for sure in this environment.

When prices are profitable and the trend is uncertain, sell something and hope you are wrong. You always have more to sell.

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