US farm officials have hammered another nail into the coffin
of the grains rally.
Sure, prices are unlikely to let off all their remaining
steam immediately. Some risk premium in values is still warranted in case of a
weather surprise, such as hot temperatures for the forthcoming US pollination
process, or an aggressive turn in the El Nino.
But it is difficult to see why crop buyers should feel much
but confidence in availability of grains and oilseeds – hardly the conditions
to inspire higher prices.
Neither of the two US Department of Agriculture reports on
Monday, on US crop inventories and plantings, held much except cheer for grain
The stocks report, on inventories as of the start of the
month, showed supplies of corn and soybeans larger than expected.
Corn inventories, besides being up more than 1bn bushels
year on year, were 140m bushels above market expectations.
Soybean supplies were also well above forecasts, if down 30m
bushels on stocks a year before.
Bumper harvest ahead
Indeed, it is true that soybean inventories are still thin -
at their lowest as of June 1 since at least the 1980s.
But they won't remain squeezed for long. The record 84.8m
acres of the crop US farmers have planted, or at least intended to, should
ensure a huge harvest, and enable a mammoth stocks rebuild.
The University of Illinois suggested that US soybean inventories
now could end 2014-15 above 400m bushels (10.9m tonnes), a 28-year high.
And that is before considering harvests elsewhere. A new
regime of low crop prices may well provoke South American farmers to prioritise
in their late-2014 planting programme soybeans, which are cheaper to grow, over
corn, a fertilizer-hungry crop.
'Largest in recent
All is not quite lost for bulls. But they have only a few
straws to clutch at.
One is that US sowings data may well prove an overestimate.
The total, all-crop area, pegged by the USDA at 330.5m acres, is the "largest
in recent history", according to broker RJ O'Brien.
Yet the US has had enough setbacks, in terms of inundations
in the northern Midwest and parts of the southern Plains, to question that
There is not that much scope to question the corn sowings
data – 98% of plantings were completed at the time of the survey, leaving only some
1.8m acres unaccounted for.
But there must be some doubt whether farmers managed to
switch quite so much of their missed corn acres into soybeans, which can be
later sown, given the persistent rains in the north.
And even if they did, there must be questions over a hugely
high yield that will be achieved.
Large sowings can imply restricted yield potential at a
national level, in bringing a crop to areas outside its ideal growing region.
Getting towards the
What crop buyers should also remember is that the downside
to prices is limited.
The cost of production typically provides some kind of floor
to values – farms which grow crops at a loss won't last for long.
Corn, in particular, looks to be offering growers little
reward. The cost of output for farmers in Iowa, the top growing state, is $4.29
a bushel according to Iowa State University, and more for successive corn crops,
which offer lower yield potential.
For soybeans, the figure is $11.13 a bushel.
That does not mean that values will not fall below these
levels. Nor that users should be rushing to lock in all their needs at current
But it does mean that consumers have seen the great majority
of the windfall from the recovery in crop supplies.