Some good news for US farmers on corn prices, at last.
Values may fall further – but not by that much, even if the
US does produce a huge harvest this year, according to analysis by Macquarie.
Some lowball figures have been going around this week for
Chicago futures, as low as $3.50 a bushel.
That figure is "definitely out there",
Jerry Gidel, chief feed grains analyst at Chicago broker Rice Dairy, said.
"Everyone seems in a race to the
bottom," in price terms.
However, a pricing model by Macquarie suggests
that the floor may be significantly closer.
The bank has drawn up the model after finding
that the traditional reliance on the stocks-to-use ratio – which offers a guide
to the extent that buyers will need to pay up for supplies – "no longer seems
"There is a link, but there is not as
good a correlation as there used to be," Macquarie analyst Chris Gadd told
Plugging historic pricing levels,
related to stocks-to-use figures, suggests that soybeans should be heading for
$6 a bushel, and corn to about $2 a bushel.
The breakdown in the relationship is
down to a step up in agricultural costs.
As farmers will know, while higher crop prices
in recent years have swollen their revenues, they have faced pressure from
higher costs of many inputs (with the notable exception of fertilizers).
"Cost of production has changed, so
modelling needs to factor in increased land valuations in the US, and Brazil's
transportation charges," Mr Gadd said.
And plugging an estimate for cost of
production into the mix shows corn prices finding support well above anything beginning
with a $2.
The result, based on a farmer renting
land in Illinois, and on data since 1990, shows a kind of sideways s-shaped
curve, where a stocks-to-use ratio below 10% sees prices trade 20-100% above
the cost of production.
When the stocks to use ratio is at
10-15%, prices trade, at best, with a 20% premium to production costs.
The current situation, with stocks-to-use
over 15%, implies prices can stay at the cost of production, but with a potential
fall of 20% below.
With Macquarie estimating the cost of
production at $4.12 a bushel, "we forecast the cash price in Illinois should
trade about $3.75 a bushel", Mr Gadd said.
"In reality there is maybe not that much
more downside from here."