Global view gloomy on commodity grains

Ray Mueller
Now Media Group


If growers of commodity grains want to blame something for the continuing gloomy price outlook, the 'global wonder weather' of the past three years is the top candidate, according to Steve Maulberger, a vice-president for ADM Crop Risk Services who indicates that his observations and opinions are his own and not officially those of the company whose main business is grain trading and processing on an international scale.

Maulberger, who has lived for extended periods on four continents during his 34 years with ADM (Archer Daniels Midland), was a guest speaker at crop insurance update meetings for clients of Premier Insurance Solutions LLC.

He noted that changes reported earlier in the day by the U.S. Department of Agriculture — a 10 million bushel cutback in soybean crushing and a 50 million bushel reduction in corn exports — will not help on price prospects in the coming months.

Global consumption of corn, soybeans, and wheat has been increasing by 1 to 2 percent in recent years but it has not kept up with production increases during the last three crop years around the world, Maulberger pointed out.

He noted that 174 million crop acres have been added around the world since 2005 but that in the United States the total crop acreage for the top three commodities has changed very little since 1980.

U.S. losing shares

As a result of global changes, however, the United States has been relegated to a third position as a supplier of those commodity grains in the world market, Maulberger observed. With current soybean crop estimates of 100 million metric tons (mmt) in Brazil and 60 mmt in Argentina, combined with major devaluations of their currencies, those countries have moved into the top spot, he said.

The world's consumption of soybeans is about 310 mmt with China importing 78 to 80 million metric tons, Maulberger noted.

At the moment, China's per acre agricultural production is about one-half of that in the United States and its nearly 350 million farmers crop an average of only .6 hectare (1.5 acres) while in the United States only 219,000 farms provide 83 percent of the production of the major crops, he noted.

China's appetite for agricultural production and food consumption has been stimulated by an eight-fold increase in per capita income since 2000 to a new average of $8,000, Maulberger stated. India, which is also still engaged in relatively primitive agricultural practices, has seen a quadrupling of per capita income during the past 15 years but that puts the average at only $1,660, he noted.

To a question on whether ChemChina is going to acquire the Switzerland-based international Syngenta agricultural supply company, Maulberger said he wasn't absolutely convinced that it will happen. He added, however, that China will be able to find the agricultural technology advances that it is seeking even without acquiring Syngenta.

Corn market outlook

In the corn market, the United States once accounted for 60 percent of the world's exports but that is down to 25 to 30 percent today, Maulberger reported. With an anticipated carryover of about 1.8 billion bushels from the 2015 corn crop, it's not surprising that per bushel prices are running at less than $4 per bushel, he remarked.

Countries with access to the upgraded facilities along the Danube River in central and eastern Europe are the lowest price suppliers of corn today, Maulberger stated. He noted that Saudi Arabia has made a major land purchase in one of those countries — Ukraine.

In China, farmers are being paid the equivalent of $7.35 for a bushel of corn (about double the United States price), Maulberger indicated. Much of that corn is put into storage before being released to users for $1.20 per bushel less thanks to a government subsidy, he pointed out.

Carryover volumes

Both within the United States and the world, there are also likely to be burdensome carryovers of soybeans and wheat that will continue to weigh on their prices, Maulberger predicted. Quality problems with the 2015 wheat grown in the United States are prompting millers to decide on whether to import good quality wheat from France for a $1 per bushel price discount, he stated.

With a downturn in economies around the world, trading volumes have dropped and shipping companies are going bankrupt, Maulberger observed. He said this in bringing vary favorable shipping rates that might play a factor in having millers in the United States import wheat although it would create a problem for them in labeling products, he explained.

Crunching the numbers

As a result of currency devaluations, soybean growers in Brazil are earning a price that's equivalent to $15 per bushel in the United States, thereby encouraging them to boost production as exemplified by the growing of five crops in two years in northern Brazil, Maulberger reported. China can buy Brazil's soybeans for 20 to 40 cents per bushel less than from the United States, he observed.

In neighboring Argentina, which has excellent export facilities, the new government eliminated the former 35 percent tax on exported grains but kept a 30 percent tax on soybeans that's to be gradually reduced, Maulberger noted. 'This makes Argentina's farmers the most profitable in the world.'

Energy sector outlook

With an excess of 1.5 million barrels of crude oil being pumped every day and with Iran re-entering the world market with up to 300,000 barrels per day, it's possible that oil prices will fall even lower, Maulberger predicted. This also hurts domestic economies, including in the United States, with the loss of high-paying jobs, he remarked.

Even with low corn prices, ethanol plants are operating at 40 to 50 cent per gallon losses and some might be forced to shut down, Maulberger reported. He said this a serious problem for dry mill plants but the wet millers can offset losses with sales of byproducts.

One bright point with ethanol is the fact that China is importing it in order to reduce its huge smog pollution problem, Maulberger noted. He also pointed out that China is making more automobiles today than the United States and Japan combined and that even a 24-lane highway in China hasn't eliminated traffic congestion.

Advice for 2016

After corn and soybean growers in Illinois lost an average of $75 and $45 per acre respectively on their production in 2015, what advice does Maulberger have for them and other growers in 2016?

At a minimum, he challenges them to reduce their input costs by $100 per acre (some of which is already occurring due to lower fuel costs). Talk to lenders, commodity brokers, and crop insurance agents, he advised.

To corn growers, Maulberger suggests stepping away from the practice of selling a major portion of their production at harvest. In reviewing prices for the past 15 years, he found that on average the best prices for corn could be obtained from February through June.

Maulberger advocates having a mix of pricing and marketing strategies. He said ADM and other marketing services can arrange for such selling practices as daily prices, 100-day windows, or accumulated sales at no cost of up to 6 cents a bushel along with the more familiar options and calls.

Short and long-term outlooks

While the economic challenges are likely to continue for the next year or two, Maulberger sees a brighter long-term outlook for agriculture. The only quick fix that he can imagine is a weather-related severe reduction in commodity crop yields around the world in 2016.

In the United States, that could happen with a combination of a wet spring that delays or prevents planting followed by a hot and dry summer that would reduce corn and soybean yields, he observed.

Noting that on the whole they are not doing so, Maulberger urges farmers to tell elected officials and the public in general that 'agriculture supports the whole economy.' One indication of that is how in the United States only an average of 6.8 percent of household income is spent on food – a percentage that is much lower than anywhere else in the world, he stated.

It's alarming that 60 percent of the children growing up in the United States today don't know that milk comes from dairy cows but so is the continued drumbeat of 'anti-agriculture people,' Maulberger remarked.

He's also bothered by the $150 billion cut in the current 5-year Farm Bill, which eliminated direct payments to growers of commodity grains and by the renewed call by the Obama administration in its fiscal 2017 budget proposal to reduce federal subsidies on crop insurance by a total of $18 billion over the next 10 years.