About Face?

Must all good things come to an end? Corn futures moved above $3 in the fall of 2006 and have held there. Soybeans moved above $7 in early 2007 and have only rarely traded below $8 since then on front-month futures. Even CBT wheat has remained above $4.25 since 2006. This three-year run has turned into a mind-set about value that may cause buyers and sellers to be complacent, even when conditions change.

This commodities roller coaster ride since 2006 was powered by various factors.
• The concept of commodities as an investment class attracted nearly $300 billion following one index or another.
• Low interest rates and hard sell-offs in equities and real estate since early 2008 also made commodities attractive.
• Talk of dwindling oil supplies and concern over dependence on foreign oil boosted global demand for biofuels.
• China and India’s rising living standards and economic growth brought rising demand, trimming global grain stocks and triggering a ‘wake-up’ call in 2006. The world’s cookie jar was running low, leaving little room for error; one major production shortfall could be devastating. Fears of food shortages accelerated foreign buying interest.
• China soybean imports rose 39% since 2006 to 43 million tonnes, 1.58 billion bushels — almost half of U.S. production!

The slide down the coaster…

The resulting explosive rallies in food and feed prices brought a 6% increase in global crop acreage by 2008, along with increased inputs to boost yields. Brazil and Argentina increased soybean acreage 13% by 2009, some 12 million acres. Fears of food shortages subsided.

Then the recession of 2008/09 hit. Many investors moved to the sideline, and global demand for many real commodities declined as industrial production slowed. The Reuters/Jefferies CRB (commodity) Index which had doubled from 2006 to 2008, retreated to the ‘06 lows.

Up we go!

Then inflation fears surfaced in ’09 as ‘green shoots’ of economic recovery appeared and budget deficits soared. Owning commodities was increasingly viewed as an inflation-hedge as well as a portfolio-diversification strategy. Major index funds were reallocating their portfolios in early 2010 to increase holdings in ag commodities and reduce energy ownership, briefly supporting ag prices.

The Big One hits

The drumbeats in Washington grew louder, however, about the role of speculators in rising commodity prices and may actually turn into tougher regulations and restrictions — and President Obama appears intent on reining in bank trading units.

Shock waves were felt around the grain industry on Jan. 12 when USDA released the 2010 Winter Wheat Seedings report, along with final 2009 Crop Production.

• U.S. corn production increased 230 million bushels to a record 13.15 billion bushels, at the top of all estimates.
• 2010 winter wheat acreage came in at 37.1 million acres, far below the average estimate and 6.2 million acres lower than last year. The wet fall of 2009 that delayed corn harvest also prevented wheat planting.
• USDA raised the estimate for Brazil’s soybean crop 2 million tonnes to a record 65M.
• Global total grains ending stocks were increased 10 million tonnes to 21 million above ’08 crop carryouts.
• Over 2 million acres exited the Conservation Reserve before Dec. 31, 2009, adding uncertainty over what crops producers would plant.

Suddenly ideas of adding 6 to 8 million acres to corn and soybean plantings in 2010 began circulating. Analysts quickly calculated how much this could add to the United States and global stockpiles. Then analysts remembered ’09 acres had declined 3+ million from 2008; what if those acres returned? After such bearish numbers, combined with the ‘get tough’ stance in Washington, how could prices move higher? Forecasts of $7 soybeans surfaced, and corn below $3 seemed less remote. Clearly the roller-coaster was destined for a steep plunge to levels not seen since 2006.