Looking back, a three-year recession and massive productive capacity in grains has continually overshadowed the fact that grain stocks have been moving toward precariously low levels, the analysts say.
End users and the market got used to this, according to Dave Hightower, president of The Hightower Report. “When you look outside the grain markets, you don’t see high beef prices discouraging demand, and we certainly did not see high energy prices in the recession discourage demand.
“We’ve come to a place in history where the consumer is not quite as put off by soaring prices,” Hightower said. “Even the hedgers that buy products from this (Chicago Board of Trade) floor have not seen the need to hedge, because they haven’t had a significant threat of extremely high prices.
“In the last two years in the wheat market, a lot of users say they could probably tolerate a $5.50 wheat price. So there is a lack of respect for what can happen.”
But that could come back to hurt end users since the only thing keeping a lid on the soybean market today is the significant expansion of soybean production in Brazil, he says.
“You have to go to the 1976-77 time frame to get to where soybean ending stocks currently stand,” he said. “In May of 1977, we reached a high of $10.76. Currently, we’re at the end of the crop year and there is not all the uncertainty that would be in the marketplace in May.”
On the other hand, processor inventories are right at the pipeline, meaning minor weather problems are going to be a major issue.
“We’re not through rationing yet,” Hightower said. “The market still has some upside. Don’t stare at the trees. Look at the forest. The upward track of bean prices should remain in place.”
As for next year, “the volatility potential is extreme,” Hightower said. “Traders looking for profits on the upside should realize that their objectives maybe should be extended. When hedging their crop next year, producers should leave that window open for what perhaps could be an historical year.
“Given the rate of gain we’ve seen already, there are going to be no small moves over the next three or four months. I still think we have an upward potential of $8.35 in January beans.”
Another assessment of the soybean stocks situation came from Joe Victor, with Allendale, Inc. He noted in a report prior to USDA’s November supply/demand estimates that even if the United States had a poor rest-of-the-year in soybean export sales, exports would still top USDA’s October estimate of sales by 112 million bushels and virtually extinguish existing estimated soybean stocks of 130 million bushels.
The U.S. corn market is also undervalued, according to Hightower, “mainly because China is no longer the 800-pound gorilla that it’s been. The grain market is becoming a protein issue. If there is a problem with soybeans and the prices get into the stratosphere, the meal/corn relationship is going to force corn prices higher in the coming years.
“This is another market that has significant volatility potential,” he said. “Producers need to leave that pricing window open. You can’t predict weather, but if the right weather does come, we could get a bigger kick out of it than we ever have.”
Ending stocks for corn “could come down 150 million bushels due to feed and industrial use,” he added. “That will tighten the situation up and add a firm underpinning for the price structure.”
As for the wheat market, “I don’t see too much change. But you don’t have the other markets leaning on it and keeping it from moving higher.”
Keep your eye on the stocks-to-usage ratios,” Hightower says. “When you have a 3 percent to 5 percent stocks-to-use range, you have a high stakes game. If you don’t have enough supply, you can have significant volatility.”
Producers have tools and option vehicles “that allow them to go into this market of what should be excessive volatility,” he added. “When you’re expecting a 19 percent increase in Brazil’s production, and you have to have that to keep a lid on the market, more than likely there are going to be some issues that sets the market off.
“But keep in mind, if the market does go off in the soybeans, it will be much more than people realize.”