THE 2014 harvest was expected to result in ample supplies, alleviating tight stocks, specifically for soybeans.
While it is clear that this will be realized, several factors have slowed the process of getting the crops on line, resulting in a prolonged tight supply situation.
A new report from Rabobank said four key supply constraints have contributed to the slow accumulation of the physical crop inventories: a late harvest, on-farm storage, market incentives for commercial storage and delays in rail transportation. The report authors also suggested that these issues would not likely be resolved until the end of the first quarter of 2015.
"While the harvests will be nearly completed by the end of November, we expect the combination of storage and transportation issues to restrict grain flow and to drive a post-harvest cash premium through (the first quarter of) 2015," they wrote.
This year's corn harvest has been the slowest since 2009 (Figure), which will exacerbate grain flow challenges, but reluctant farmer selling is actually the most critical factor in determining grain flow for the 2014-15 crop.
According to the report, the U.S. started November with available corn stocks down 1 billion bu. — or 18% — compared to year-earlier levels, which included 2013 stocks that were hampered by the 2012 drought.
"Although the 2014 corn harvest is progressing and will likely be completed before December, many elevators report slow progress in filling commercial storage due to farmers' preference to store on farm," the report explains.
The main driver of this has been a reluctance to sell below breakeven prices, which Rabobank estimated to be in the $4.20-4.50/bu. range for a median farmer in the Midwest. Rabobank said it expects 64-68% of stocks to be on farms as of Dec. 1, with flat to 12% lower off-farm storage.
"With significant stocks not yet priced, there is a high probability that cash prices will drop significantly when grain flow increases," the authors suggested. However, they predicted that a cash premium reflecting the risk of selling unpriced grain would likely develop for the portion of the crop put into storage through the first quarter of 2015.
"Rationalizing corn storage from the 2014 season with new crop production of 2015-16 is expected to drive price volatility," the authors stated.
Additionally, they suggested that significant liquidation of the 2014-15 crop may be delayed until March and July as higher profit margins over the past six years mean that farmers are in a financial position to hold the 2014-15 corn crop at least into the second quarter of 2015.
"March is the normal period when cash is needed for operational expenses," they wrote.
In addition, the report notes that late crops tend to be stored wet, which increases the need to liquidate storage in the spring to avoid spoilage loss. "Consequently, we expect to see crop sales increase in March, which will pressure cash bids lower," the authors added.
Conversely, futures prices will be driven by the possibility for fewer corn acres in 2015, Rabobank said. "Widening new-crop to old-crop spreads will be key as the value of the 2014 crop in storage varies depending on expectations for the size of new-crop production," the report says. If normal planting and pollination occur, July will be the next key period for increasing grain flow after March.
Soybeans ended the 2013-14 marketing year in an extremely tight supply situation, and many stakeholders were banking on the fact that the 2014 harvest would quickly replenish stocks.
The delayed harvest, however, has caused price rallies in both soybeans and soybean meal. Since Oct. 1, Rabobank said soybean futures have rallied $1.50/bu. (13.9%), while soybean meal futures have rallied $100 per ton (38.4%). Additionally, the report authors said the basis levels for soybeans and soy products have rebounded from their October lows.
Tight soybean and product supplies are not expected to ease until late November or early December.
"Both crushers and buyers have been living hand-to-mouth, anticipating the big harvest to fill the pipeline and drive both futures and basis lower, which has not occurred yet," the report explains. "To exacerbate the delay in harvest, the well-documented U.S. rail logistics issues have starved the broiler and hog producers of soybean meal in the U.S. Southeast."
"U.S. rail transportation will likely play a role in grain flow, depending on the severity of the 2015 winter," the report adds. "One- to two-week delays are reported in North Dakota and South Dakota, with similar delays in the Southeast."
According to the report, lack of corn movement to destination areas such as the Southeast will magnify grain deficits created by the late harvest and storage.
Furthermore, the authors pointed out that the high cost of rail transportation, which they calculated to be $1.00-1.40/bu. in the northern Plains, will encourage farmers to store grains in those areas.
"However, January and February will be the riskiest months for significant grain flow disruptions as severe winter weather could cause further rail problems," they said.
The University of Missouri's Food & Agricultural Policy Research Institute (FAPRI) recently released its November update of U.S. crop price projections for 2014-18, which indicated only small changes from the October estimates for most crops.
The projected corn price for the 2014-15 marketing year was increased slightly to $3.50/bu. after the U.S. Department of Agriculture's November "Crop Production" report slightly reduced its estimate of this year's record U.S. corn crop.
Reduced corn acreage and an assumed return to trend-line yields resulted in smaller projected corn supplies in 2015, which FAPRI said allows corn prices to recover to $3.89/bu. for the 2015-16 marketing year and to exceed $4.00/bu. from 2016 to 2018.
Offsetting increases in soybean production and use leave projected 2014-15 soybean prices at $10.00/bu., very close to last month's estimate, according to the FAPRI update.
Soybean acreage could stay near this year's record in 2015, and the resulting large soybean supplies will cause projected 2015-16 prices to drop to $9.10/bu., FAPRI said. From 2016 to 2018, it projected soybean prices to average around $10/bu.
The wheat outlook was also mostly unchanged from October. FAPRI projected wheat prices to decline from $5.90/bu. for 2014-15 to $5.36/bu. in 2015-16 and to remain below $6/bu. through 2018.
Brazil's soybean harvest is expected to occur later than usual due to a drought that has delayed planting, grain crushing industry association Abiove recently told Reuters.
Brazil's main center-west grain belt has been experiencing dry weather, which has delayed soybean planting and even resulted in some replanting. Depending on how things go in the next few weeks, the area could end up being 20-30 days delayed.
Key growing regions have gotten rain showers over the past couple of months. While this was expected to continue, the planting delay would place harvest right at one of the rainiest periods of the year, possibly causing harvest delays due to wet fields.
Harvest progress was the main focus of the markets last week as U.S. farmers neared completion. USDA reported that 89% of corn and 94% of soybeans had been harvested as of Nov. 16. Grain movement also seemed to be improving, alleviating concerns about the prolonged tight supply.
Both corn and soybean prices fell from Monday through Wednesday last week. Despite nearby soybean futures closing higher on Monday at $10.3625/bu., the market couldn't find much to sustain those levels, and by Wednesday, January soybeans had plunged to settle at $10.0475/bu.
Corn also closed lower last Monday through Wednesday. Harvest progress was a large reason for the losses, but slower demand was also a contributing factor. December corn settled at $3.775/bu. last Monday and continued to slip, closing at $3.6325/bu. on Wednesday.
USDA's weekly export report changed the story last Thursday, however, revealing better-than-expected demand for both corn and soybean meal.
Soybeans were excluded from the reports of increased demand, but sales announcements stepped in to boost soybean prices.
December corn closed higher at $3.7325/bu. last Thursday, and nearby soybeans closed at $10.205/bu.