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Plenty of reasons to be bearish heading into 2012 growing season With a 165-bushel average yield and

By Matt reeSe Farmers are used to the inconsisten-

cies of the weather. They know how to handle bugs and weeds and they are used to rolling the dice in the gamble of agriculture each year on their farms. But in 2012, the profitability of corn and soybean growers may depend more on some Greek financial minis- ters, Chinese pork demand and biofuel politics. Ohio State University economist

Matt Roberts shares the bearish senti- ment of many economist for the com- ing year due to factors very far removed from the farm fields of Ohio. He feels, for several reasons, those fac- tors are aligning in favor of lower prices for corn and soybeans. “The amount of demand growth we

have seen in the last 20 years is unprecedented. It is driven by Chinese demand for meat and U.S. demand for ethanol,” Roberts said. “Meat demand in China is driving oilseed demand. Globally we’re growing 40% more soy- beans than we did 10 years ago at near- ly triple the price. That is incredible, explosive demand.” There are signs that this growth in

demand may slow, however. “The ethanol blenders credit,

VEETC, expired and we are at or past the blend wall for E10. From a corn grower’s perspective, the Renewable Fuel Standard still requires 15 billion gallons that is currently on the books.

But under the best case scenario, ethanol demand stays steady,” Roberts said. “And the European Union is now a larger customer for China than the United States. If we see Greece ejected from the Euro and it is handled poorly, the impact on the Chinese economy will be very measurable and push them into what they think is a recession and we lose that other leg of strong demand that will stagnate.” And, as incredible as the demand

growth has been, the productivity of farmers has mostly kept up. “Corn inventories are very tight

because we have had two consecutive below trend, disappointing yields and that is why we have tight supplies and high prices. This is the first time since 1980 there have been two consecutive below-trend yields,” he said. “I don’t think that most producers are putting enough weight on the fact that we are in a short crop year. All it takes to lower prices is a normal year. I think there is a tremendous amount of down- side risk here.” With this in mind, Roberts outlines

three possible scenarios in the markets. “If we hit 165 bushels per acre, it

would be a solid year, but not a great year,” he said. “This could happen if the weather was good, but not perfect, and planting went well enough to get 95 million acres of corn planted this spring, which is still lower than some people are predicting.”

95 million acres of corn planted, the nation’s 2012 harvest would be 14.6 billion bushels, which would provide 15.4 billion total bushels of corn with the carryin. “In this scenario, it will be a matter

of how fast the livestock demand can rebound,” Roberts said. “With flat ethanol demand, we would really need a rebound in livestock demand. The cattle cycle is very slow to adjust, so it would have to be poultry that would adjust more quickly. In this high yield scenario, feed use grows by 9% to 10% and we end up with 1.8 to 1.9 billion bushel carryout and a $4.10 marketing year average price.” If planted corn acreage is only 94

million acres this spring and the grain harvest is 86.48 million acres with a conservative 161.3-bushel yield, it would result in a 13.95 billion- bushel harvest. “Combined with carryin, there

would be 14.8 billion bushels of corn available next fall,” Roberts said. “If livestock rebounds, ethanol is flat, and exports rebound a lot, we get a 1.5 bil- lion-bushel carryout. With my models, that gives us a $4.50 marketing year average price.” On the low yield side, though not

extremely low, the national average yield could be 155 bushels per acre, with a 13 billion bushel harvest. This would be a third consecutive year with

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14Markets • Ohio’s Country Journal • • Mid-March 2012

corn yields below the trendline. “With this, we are talking about

prices staying where they are, unless we see severe drought or a disaster in South America,” Roberts said. With these possible scenarios in

mind, Roberts has plenty of reasons to be bearish. “I think a lot of farmers are looking

back to last summer and the basis bonanza we had that was in response to that second short crop we had last year. When you get into a year and you’re tight coming into summer, you can get the basis really bid up,” he said. “If we get a normal crop this year, you won’t see that. It can happen, but it is a low probability event. I think we are probably on a downhill slide with price to next harvest. Unless we get a really severe weather event, I don’t see prices getting much higher. If we get delayed planting, that will support prices until the market remembers the 2011 planting.” For the new crop, Roberts advises

marketing soon. “I believe there is a higher probabili-

ty of lower prices, that means contract now. If you are worried about higher prices this summer, re-own that on paper. Don’t do that with your physical bushels,” he said. “Soybeans have less downside because they are probably going to lose acres to corn. South American crop stress could support prices as well.”

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