A robust bull market for grains, and indeed for many commodities, began in August 2020. Over the following months, the price of corn doubled and soybean meal rose by 50%. In May of this year, prices probably peaked. Barring a drought in the Midwest, which looks increasingly unlikely, higher prices are now in the mirror and grain prices will continue to moderate.
If May was indeed the peak of the market, a bearish market mood begins to set in. Buyers become less anxious to buy and sellers become more anxious to sell. That seems to be the grain situation right now.
While COVID-19 still casts a dark shadow over economic activity, the economic expansion is real. Global economic growth is estimated at 5.6% this year, down from just 4% a few months ago. The outlook is also improving for the global chicken industry.
There are still a lot of things that could still go wrong in the chicken industry. The Delta strain of COVID is a setback that could affect the global economic recovery; grain prices could rise in the event of a last minute drought in the United States; and the recent bird flu epidemic in Asia and Europe could return with greater impact next fall.
Despite these challenges, the recessionary effects on the global economy from the pandemic are expected to diminish as more people get vaccinated. Now it looks like the economic recession and recovery will be a weirdly shaped “W”. Last year’s slowdown was followed by a large percentage increase this year over last year; The global economic growth rate will then decline in 2022 as easy comparisons end and finally take off in 2023.
The demand for animal protein is normally diminished during times of economic recession since meat is a luxury for most of the world’s population. In the case of this recession, the negative effects on the demand for protein have been somewhat mitigated by the massive efforts of many governments to support consumer incomes. As a result, the meat recession has been milder than expected and demand is strengthening in many countries.
The poultry industry was well placed to overcome this crisis. In times of recession, demand shifts from more expensive meats to poultry. Additionally, the recent slow expansion in poultry production last year due to the COVID-related recession has resulted in a chicken shortage this year in the face of renewed demand resulting in an increase in the price of chicken.
After peaking in May, the price of corn fell and then reversed. The ending stock is low for this year and next year. The last crop year, 2019-2020, ended with a U.S. inventory of 1.9 billion bushels. This crop year, 2020-2021, the final stock will be only 1.1 billion bushels. Much of the reason for this drop was the sudden increase in exports to China. For next year, closing stock is expected to rise only slightly to 1.2 billion bushels, which is a bullish number. However, other figures indicate moderation in prices. More importantly, the number of stocks at the end of the world is ample and is expected to increase for the next crop year. Additionally, there are no serious issues in the rest of the world that would point to a resurgence of the bull market. Argentina and Brazil’s exports are stable and while China’s imports will be high for the next crop year, they are not expected to exceed those for this crop year.
For the bull market to return, more news will be needed. Barring a drought, there doesn’t appear to be any significant new bullish news. As can be seen from the WASDE report, US corn exports are expected to moderate in the next crop year, while the feed supply is expected to decline steadily and the harvest is expected to exceed that of the last year. In particular, agricultural prices are expected to increase during the next crop year. This is not because the price peak is yet to come, but rather that the average for the next crop year is likely to exceed the average for this crop year. In addition, the USDA projection for the average farm price may be too high. The average price for the 2022-2023 crop year is very likely to return to lower levels.
As with corn, much of the reason for the price hike was increased exports to China to feed a growing pig population back after African swine fever. This one-time increase is over and soybean meal prices are down from their record highs at the start of the year. The drop in prices was helped by high soybean oil prices and good harvests in the southern hemisphere. When soybean oil prices are high, meal tends to drop as more soybeans are ground for oil. Additionally, Brazil and Argentina produce significantly more soybeans than the United States, so a good harvest in the southern hemisphere ensures that there is a limit to the rise in soybean prices. This crop year, Argentina and Brazil together produced 183 million metric tons (MMT) compared to 112 MMT produced by the United States. For the next crop year, Argentina and Brazil are expected to produce 196 MMT. More importantly, the exports of the two countries are expected to increase from 131 MMT to 146 MMT (+15 MMT) the next crop year.
Although the United States does not dominate world soybean production, the low number of ending stocks in the United States has raised concerns. Closing stock will fall to the bare minimum of pipeline levels by the end of this month (the end of the crop year) and barely recover next year. Meanwhile, the global closing stock is relatively high and stable. The average price of soybean meal this crop year is $ 100 higher than the previous crop year. However, unlike maize, the average price for the next crop year is not expected to increase but rather stay at current levels. Finally, in 2022-2023, prices should fall back to more normal levels.