The ag markets went on a roller coaster ride for 2020, starting off with turmoil of the coronavirus pandemic and recovering by the end of the year.
That was the case for grains, which in recent weeks have turned into a full-fledged, demand-led bull market, especially soybeans.
DuWayne Bosse with Bolt Marketing doesn't expect the soybean rally to slow any time soon with historically tight ending stocks. The U.S. Department of Agriculture pegged stocks at 175 million bushels in the December World Agricultural Supply and Demand Estimates Report, but he thinks that number will need to be tightened at or below 100 million bushels in the January report with an increase in crush and exports.
"Well, right now I guess you'd have to say demand is showing that we have to raise exports 75 million I would say, and crush I'd say 10 to 15 million bushels," he says.
That would be below pipeline supplies. However, Jim McCormick with AgMarket.Net doesn't think the U.S. will run out of soybeans or that the USDA will drop the stocks that low yet.
"You're going to see the carryout drop, I think, below 100 million when it's all said and done. Will they do it all in January? Probably not," he says.
He thinks the U.S. will, however, import beans from Brazil to try to bridge the gap in late summer before the new crop is harvested.
"Plain and simple, there's just not enough beans in the world to meet this Chinese demand at the moment," he says.
As a result, both McCormick and Bosse believe soybeans will need to go much higher to ration demand. It is unknown how many more bushels of soybeans China will need, but they had bought 1.17 billion bushels as of Dec. 23. The speculation is the dryness in Argentina and southern Brazil will cause that crop to be later, and the U.S. will pick up more business into February.
"I think we all know they've been just dry enough we can start probably trimming off those record high numbers we were projecting earlier in the year," Bosse says. "But they are getting, you know, scattered rains every once in a while so I don't think it's a disaster."
However, he says even a record crop in Brazil may not be enough to curb soybean prices in the current demand-driven market.
Soybean prices are at six-year highs on the charts, which makes it difficult to predict how high prices will need to go to ration demand. However, McCormick thinks prices are still too cheap.
"I think we've got to go to $15 beans when it's all said and done. I think at a minimum when you look at the stocks to use ratio down near 3%, historically that's what brought beans back up near $15," he says.
He says the weakness in the U.S. dollar is adding to the problem, as it has hit 2 1/2 year lows and gives a currency break to importers around the world.
Both market analysts agree corn will continue to follow soybeans to bid for acres, especially in the spring. However, the corn market may have enough of its own demand story to provide some support to the market. McCormick says a lot of it depends on how much additional corn China is going to need.
"Our best guess is at a minimum they bought at least 19 million metric tons of corn. We've heard a lot of private estimates that say they're going to buy 25 to 30 million metric tons of corn. So, if China needs to buy like that plain and simple our carryout is going to drop," he says.
He thinks it could be as low as 1.5 billion bushels.
The other side of the demand equation is ethanol, and with gas demand slowing down due to COVID-19 restrictions, there is a concern that will negatively impact ethanol production. However, Bosse doesn't think USDA will make downward adjustments going forward.
"I don't think right away here in this January report. We're not that far off the current projections. Yeah, the ethanol picture isn't rosy right now; that's kind of the stepchild in the supply and demand table right now. But it's not horrible. It'll be all right," he speculates.
However, how much higher do corn prices have to go to get enough acres if the corn-soybean acreage battle heats up this spring?
"That's a hard question because it really depends on how high beans go. I mean if you keep, if you get beans in the teens, you know I think beans are going to be attractive to a lot of producers," McCormick says.
Bosse agrees there is more upside potential in the corn market due to the acreage battle, but he isn't as bullish on corn as he is on soybeans.
"The stocks to use ratio is tight, but it's just not as tight as soybeans. I had targeted once we got up to this $4.40 in March corn, I started scale up selling from there on the old crop. As far as the new crop goes, I'm anywhere from that $4.20 area where you start to sell and I would scale up sell to $4.75," he says.
The wheat market is essentially tagging with corn and soybeans for the next couple of months because the Northern Hemisphere's crop is in dormancy.
"I see wheat as being a follower," Bosse says.
McCormick says the market may have limited upside the next couple of months, "I think you'll probably see it maybe go 50 cents higher, maybe a little bit higher. It's going to be the lagger throughout the winter. You know, we're going to follow the beans, and then the corn. But the spring wheat, you know it's going to have to battle for acres, so I would look for that market to maybe find a little bit of strength."
Uncertainty but optimism for livestock
Pat Von Tersch with Professional Ag Marketing says a lot of the upside potential in cattle prices is tied to how fast the U.S. can get COVID vaccines in place and start reopening the restaurant sector and the economy. Beef demand has been surprisingly strong even with the food service hiccups, so he says there is some optimism looking forward.
"Hopefully you would expect to see some better economic activity as we work through 2021. That should be good for food service trade, that should be good for demand overall," he says.
Processing disruptions to end 2020 tied to COVID were minimal, and the industry has done a great job of making adjustments to keep workers safe and lines moving at near normal capacity.
"We'll keep our fingers crossed, but no question that we're in better shape than we were last spring," Von Tersch says.
The supply of cattle is expected to get a bit tighter moving into 2021 as well.
"I think we've really turned the corner as it relates to no longer expanding the herd year over year. The last Cattle on Feed Report helped to support that theory, and in terms of backed up cattle I think we've gotten ourselves as current as we wanted to," Von Tersch says.
For these reasons he projects a slight improvement in live cattle futures in first quarter.
"We still target that mid-$120 area on April live cattle as a possibility," he says.
The outlook for hogs is a bit more uncertain. Hog supplies were at record levels in December, but Von Tersch says they look to be cooling off in the first quarter of 2021.
"We've really been on a 10-year kick on building the hog herd in North America, and I'm hopeful that we're able to change that trend as we work into 2021," Von Tersch says.
Even at that, though, the U.S. will have abundant pork supplies.
So, the other key will be demand. 2020 will be a record year for pork exports in part due to China's robust buying. They were in need of pork after African swine fever decimated their herd. However, China has been aggressively rebuilding and is at nearly 90% of pre-ASF levels. Von Tersch says he thinks China will continue to buy some U.S. pork, but there is still some question about how successful they will be with no ASF vaccine yet. Plus, he says other countries will make up some of the difference due to a favorable trade environment that will promote exports.
Von Tersch says with the uncertainty about COVID and the hopes for continued exports, the back months lean hog futures have been running at a premium to the nearby months, and he thinks that trend is likely to remain.
"The hedging opportunities for 2021 have been running $10 to $12 better than what we've experienced in the spot market this year and $4 or $5 better than what we've experienced the three years prior to this one, and so I do think there's some opportunities there to transfer risk," he concludes.