U.S. grain prices seen extending drop after drought rally

Grain futures will extend their setback from record highs this summer as concerns ease about the worst U.S. drought in more than half a century, according to speakers at an annual commodities conference.

Corn futures at the Chicago Board of Trade (CBOT) have already pulled back 13 per cent from an all-time high of $8.43-3/4 a bushel set on Aug. 10 as hot and dry conditions devastated the crop in the United States, the world’s top grain exporter (all figures US$).

CBOT soybeans have retreated 15 per cent from their record high of $17.94-3/4 a bushel set on Sept. 4.

Still, grains are "egregiously overpriced due to the drought," said Dennis Gartman, publisher of the well-known Gartman Letter, at IndexUniverse’s Inside Commodities Conference in Chicago on Wednesday.

Investors have been cashing out profits as the harvest in the U.S. has advanced at a fast pace and after timely rains in August helped the soybean crop during its key growth stage.

Corn for December delivery on Wednesday fell 5-1/4 cents to $7.36-3/4 a bushel, while December wheat rose 5-1/2 cents to $8.69-3/4 a bushel. November soybeans closed down 26-3/4 cents at $15.23-1/4 a bushel.

The U.S. Department of Agriculture will update its supply-demand data in its monthly report on Thursday, which analysts expected to show an increase in the soybean yield and crop size and a decline in corn production because of farmers not harvesting large swaths of the crop due to drought damage.

Sell grains

Asked to name a trade he thinks will be profitable during the coming year, Gartman said he would take short positions, or bets that prices will fall, in grain futures, while making bullish bets in gold.

Gold futures hit an 11-month high on Friday on hopes that the Federal Reserve, European Central Bank and other major central banks would continue pumping money into the global economy to stimulate growth.

Wheat prices, which followed corn prices higher this summer, will decline if the crop seeded in the U.S. this fall receives rain, Gartman said.

"I suspect we’re going to see the drought conditions alleviate in the Midwest over the next year," he said.

Ashmead Pringle, president of GreenHaven Commodity Services, told attendees at the conference that soybean futures will drop to about $12.50 a bushel, which he said was the average of its new trading range. That’s down a whopping 30 per cent from its peak and 18 per cent from current prices.

Corn futures will fall almost 35 per cent from their peak and 25 per cent from current prices to around $5.50 a bushel, and wheat will slide about 14 per cent from current prices to about $7.50/bu., he said.

If investors see prices fall below those levels, "that’s a good place to take some length," Pringle said, referring to bullish bets. "I’m a little reluctant to be long now."

China supports prices

Despite expectations that grains will weaken, analysts at the conference said China will continue to be a major buyer of agricultural commodities, preventing a collapse in prices.

Bill Tierney, chief economist for AgResource, said he was "extremely bullish" on China’s consumption of farm products because the country’s limited water supply makes it dependent upon imports.

China is the world’s top importer of soybeans and has the potential to become a significant importer of corn due to rising demand for meat from livestock fed by the grain.

China’s ability to grow crops also is capped by its limited amount of arable land. Tierney estimated that about 7 percent of the country’s land is arable.

China’s appetite for meat will not go away because increased consumption of protein has become part of its culture, said Paul Dietrich, chief executive officer of Foxhall Capital Management. That means it will by necessity continue to import grains and soy.

"Where we grew up with our mothers telling us to eat our vegetables, their mothers are telling them to eat their protein," Dietrich said.

— Tom Polansek reports on the agriculture sector from Chicago for Reuters.


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