Crop Market Crop Market ““OutlookOutlook””Darren HudsonDarren HudsonCombest Chair of Agricultural CompetitivenessCombest Chair of Agricultural CompetitivenessTexas Tech UniversityTexas Tech University

Background ConditionsBackground Conditions——Economic Economic Growth and Oil PriceGrowth and Oil Price

Source: IMF and EIA

BackgroundBackground

Rapid increase in commodity pricesRapid increase in commodity pricesDeclining U.S. dollarDeclining U.S. dollarSome signs of economic recoverySome signs of economic recoveryStrong commodity demand from developing Strong commodity demand from developing countriescountries

Cotton PricesCotton Prices

Wow, what a ride!

CausesCauses

FundamentalsFundamentalsVery low stocksVery low stocks——43% stocks43% stocks--toto--use last year, 25% this use last year, 25% this yearyear——rapid increase in demand with little stocks rapid increase in demand with little stocks available; Global stocks decreased by 26% last yearavailable; Global stocks decreased by 26% last yearProduction problems in Australia and PakistanProduction problems in Australia and Pakistan

Australia is small, but all production goes into export Australia is small, but all production goes into export marketsmarkets

Smaller Chinese crop, increased demandSmaller Chinese crop, increased demandWeaker U.S. dollarWeaker U.S. dollar

What about speculators?What about speculators?

Speculative Pressure?Speculative Pressure?

-40,000-20,000

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100

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Cen

ts/L

b.

Index Funds Hedge Funds Nearby Futures

Source: CFTC

Speculative Pressure?Speculative Pressure?

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Cen

ts/L

b.

Long Less Short Nearby Futures Price

Net Bale Commitment of Speculative Traders in Nearby Futures Price

ObservationsObservations

Commodity markets extremely volatile (12+ cent Commodity markets extremely volatile (12+ cent move, or 9.3%, in just two days)move, or 9.3%, in just two days)

Global unrestGlobal unrestLow stocks/production uncertaintyLow stocks/production uncertainty

Volatility is killing merchants tooVolatility is killing merchants too……still some good still some good contracting opportunities out there but beware of contracting opportunities out there but beware of ““countercounter--party riskparty risk””

Price Price ““ForecastForecast””

O.A. Cleveland, MSU, O.A. Cleveland, MSU, ““$1.00$1.00--$2.00$2.00””Just kidding of course, but not an unrealistic range given Just kidding of course, but not an unrealistic range given this yearthis year

Quite a range (December Contract)Quite a range (December Contract)$0.90$0.90——Low end; higher than average U.S. production on Low end; higher than average U.S. production on more acres, good weather in Australia and Pakistan, better more acres, good weather in Australia and Pakistan, better production in China and Brazilproduction in China and Brazil$1.10$1.10——MidMid--high range; Average production globally, high range; Average production globally, continued higher textile demandcontinued higher textile demand$1.30$1.30——High end; lower production (weather events)High end; lower production (weather events)$1.50$1.50——Possible; severe adverse weather or rapidly Possible; severe adverse weather or rapidly increasing demandincreasing demand

Corn/GrainsCorn/Grains

Composite Grain Index

Corn/GrainsCorn/Grains

Obviously, speculative interest is playing a roleObviously, speculative interest is playing a role400K net long positions was the max during the 2008 400K net long positions was the max during the 2008 price runprice run--up; approaching 600K nowup; approaching 600K now

Energy prices driving Energy prices driving andand following grain pricesfollowing grain prices

Demand is on upward trendDemand is on upward trend

World World Per CapitaPer Capita Grain Grain ConsumptionConsumption

barley, corn, millet, mixed grains, oats, rice , rye, sorghum, wheat

kg

GrainsGrains

Different elements driving different productsDifferent elements driving different productsCornCorn——Renewable Fuel StandardRenewable Fuel StandardSorghumSorghum——RFS 2RFS 2ndnd Generation Potential/Lost TradeGeneration Potential/Lost TradeWheatWheat——Weather eventsWeather events

While occurring roughly at the same time, must be While occurring roughly at the same time, must be careful not to overcareful not to over--ascribe same causationascribe same causation

Price OutlookPrice Outlook----CornCorn

World Days of Use on Hand

Price OutlookPrice Outlook----CornCorn

Price OutlookPrice Outlook----CornCorn

Source: USDA/Mark Welch

Price OutlookPrice Outlook----CornCorn

$5$5--$6 average price possible$6 average price possible

La NiLa Niñña??a??——Persistent effect tends to make Western Persistent effect tends to make Western Corn Belt drier in the springCorn Belt drier in the spring

Trouble Ahead?Trouble Ahead?

ConclusionsConclusions

Price volatility will continue to be very highPrice volatility will continue to be very highLow stocks reduces market Low stocks reduces market ““bufferbuffer”” to supply shocksto supply shocksIf weather patterns are closer to If weather patterns are closer to ““normalnormal”” could see could see some stock rebuilding this yearsome stock rebuilding this year……slightly lower pricesslightly lower pricesSocial unrest in Middle East is a wild cardSocial unrest in Middle East is a wild card——increases increases uncertainty and price volatilityuncertainty and price volatility

Be wary of counterBe wary of counter--party risk in contractsparty risk in contracts……do not do not pass on good pricing opportunitiespass on good pricing opportunities…”…”all you eggs all you eggs in one basketin one basket””