Agricultural Prices Fundamentally Supported ...
Higher prices are needed to ration demand in the near term and encourage expansion in the medium term.
By Hussein Allidina & Bennett Meier THROUGH THE SUMMER,
agricultural commodities have bucked the falling trend across most asset classes that have been plagued by growing fears of recession in developed markets. After a year of poor supply in many of the world’s major grain producers, concerns regarding a production disappointment out of the United States — the world’s largest corn and soybean producer — leave us more confident that higher agricultural prices are here for at least another year.
US Production Challenged In the 2010/11 marketing year, now drawing to an end in the
US, early hope of strong production across major US row crops were dashed when summer heat prompted significant downward yield revisions. US corn yields fell from 164.7 bu/acre in 09/10 (when the weather was almost perfect) to a below-trend 152.8 bu/ acre in 10/11, sending US stocks-to-use (S/U) down to a 15-year low of 5.9%. Now in 2011/12, hot, dry weather across much of the US cornbelt is again threatening yields, portending another year of poor supply and potentially even lower stocks.
... these are not likely be the last write-downs to production that we see out of the USDA
The USDA recently acknowledged this threat in its monthly
World Agricultural Supply and Demand Estimates (WASDE) report, where it lowered its 11/12 corn yield forecast from 158.7 bu/acre to just 153.0 bu/acre, erasing more than 500 mn bu of corn from the US balance sheet. Similarly, a decline in acreage estimates — owing largely to flooding in the Missouri and Mississippi river basins — as well as lower anticipated yields prompted a 170 mn bu (5%) reduction in the USDA’s soybean production estimate, lowering projected S/U to just 4.9%. We note that these are not likely be the last write-downs
to production that we see out of the USDA this year; drought conditions continue to spread across much of Oklahoma and southern Kansas, destroying crops and raising abandonment rates. With little hope for improvement in sight, we do not rule out the possibility that even less corn acreage is ultimately harvested.
Figure 1: US Corn S/U Falling to Near Record Lows
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
US Stocks to Use Ratio, %
Sources: USDA, Morgan Stanley Commodity Research estimates 46 September 2011
80/81 84/85 88/89 92/93 96/97 00/01 04/05 08/09 10/11e 11/12e 12/13e
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