Crop Market “Outlook”
Darren Hudson
Combest Chair of Agricultural Competitiveness
Texas Tech University
Background Conditions—Economic
Growth and Oil Price
Source: IMF and EIA
Background
y Rapid increase in commodity prices
y Declining U.S. dollar
y Some signs of economic recovery
y Strong commodity demand from developing
countries
Cotton Prices
Wow, what a
ride!
Causes
y Fundamentals
y Very low stocks—43% stocks-to-use last year, 25% this
year—rapid increase in demand with little stocks
available; Global stocks decreased by 26% last year
y Production problems in Australia and Pakistan
y Australia is small, but all production goes into export
markets
y Smaller Chinese crop, increased demand
y Weaker U.S. dollar
y What about speculators?
No. of Contracts
0
60
-20,000
40
-40,000
20
Source: CFTC
1/31/06
3/7/06
4/11/06
5/16/06
6/20/06
7/25/06
8/29/06
10/3/06
11/7/06
12/12/06
1/16/07
2/20/07
3/27/07
5/1/07
6/5/07
7/10/07
8/14/07
9/18/07
10/23/07
11/27/07
1/1/08
2/5/08
3/11/08
4/15/08
5/20/08
6/24/08
7/29/08
9/2/08
10/7/08
11/11/08
12/16/08
1/20/09
2/24/09
3/31/09
5/5/09
6/9/09
7/14/09
8/18/09
9/22/09
10/27/09
12/1/09
1/5/10
2/9/10
3/16/10
4/20/10
5/25/10
6/29/10
8/3/10
9/7/10
10/12/10
11/16/10
12/21/10
1/25/11
140,000
180
120,000
160
100,000
140
80,000
120
60,000
40,000
100
20,000
80
Weekly
Index Funds
Hedge Funds
Nearby Futures
Cents/Lb.
Speculative Pressure?
-4
1/27/06
2/24/06
3/24/06
4/21/06
5/19/06
6/16/06
7/14/06
8/11/06
9/8/06
10/6/06
11/3/06
12/1/06
12/29/06
1/26/07
2/23/07
3/23/07
4/20/07
5/18/07
6/15/07
7/13/07
8/10/07
9/7/07
10/5/07
11/2/07
11/30/07
1/4/08
2/1/08
2/29/08
3/28/08
4/25/08
5/23/08
6/20/08
7/18/08
8/15/08
9/12/08
10/10/08
11/7/08
12/5/08
1/2/09
1/30/09
2/27/09
3/27/09
4/24/09
5/22/09
6/19/09
7/17/09
8/14/09
9/11/09
10/9/09
11/6/09
12/4/09
12/31/09
1/29/10
2/26/10
3/26/10
4/23/10
5/21/10
6/18/10
7/16/10
8/13/10
9/10/10
10/8/10
11/5/10
12/3/10
12/31/10
1/28/11
Millions
8
6
4
2
0
-2
Long Less Short
180
160
140
120
100
80
60
40
20
0
Nearby Futures Price
Net Bale Commitment of Speculative Traders in Nearby Futures Price
Cents/Lb.
Speculative Pressure?
Observations
y Commodity markets extremely volatile (12+ cent
move, or 9.3%, in just two days)
y Global unrest
y Low stocks/production uncertainty
y Volatility is killing merchants too…still some good
contracting opportunities out there but beware of
“counter-party risk”
Price “Forecast”
y O.A. Cleveland, MSU, “$1.00-$2.00”
y Just kidding of course, but not an unrealistic range given
this year
y Quite a range (December Contract)
y $0.90—Low end; higher than average U.S. production on
more acres, good weather in Australia and Pakistan, better
production in China and Brazil
y $1.10—Mid-high range; Average production globally,
continued higher textile demand
y $1.30—High end; lower production (weather events)
y $1.50—Possible; severe adverse weather or rapidly
increasing demand
Corn/Grains
Composite Grain Index
Corn/Grains
y Obviously, speculative interest is playing a role
y 400K net long positions was the max during the 2008
price run-up; approaching 600K now
y Energy prices driving and following grain prices
y Demand is on upward trend
World Per Capita Grain
Consumption
kg
barley, corn, millet, mixed grains, oats, rice , rye, sorghum, wheat
Grains
y Different elements driving different products
y Corn—Renewable Fuel Standard
y Sorghum—RFS 2nd Generation Potential/Lost Trade
y Wheat—Weather events
y While occurring roughly at the same time, must be
careful not to over-ascribe same causation
Price Outlook--Corn
World Days of Use on Hand
Price Outlook--Corn
Price Outlook--Corn
Source: USDA/Mark Welch
Price Outlook--Corn
y $5-$6 average price possible
y La Niña??—Persistent effect tends to make Western
Corn Belt drier in the spring
Trouble Ahead?
Conclusions
y Price volatility will continue to be very high
y Low stocks reduces market “buffer” to supply shocks
y If weather patterns are closer to “normal” could see
some stock rebuilding this year…slightly lower prices
y Social unrest in Middle East is a wild card—increases
uncertainty and price volatility
y Be wary of counter-party risk in contracts…do not
pass on good pricing opportunities…”all you eggs
in one basket”