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DAVID KRUSE

By Staff | Jan 21, 2011

It has been a long time coming. Growth in global commodity demand has been slowly consuming any remaining excess production capacity so that “demand ratios to use” have tightened for all crops to critical levels.

Production capacity must expand and markets are competing to get farmer’s attention to maximize production in 2011.

There is no longer any slack in surplus stocks of one crop to give acres to another with tight stocks. They all need more acres and top grade farmland is already in production.

The CRP is locked up with only 300k acres available. Double cropping will set a record if weather permits. Farmers will maximize investment in crop inputs using expensive, but high-yielding, seed and inputs like fungicides. Local tests showed a 10 bushel per acre yield response to corn fungicide. That is not as exciting if corn is $3 bushel as it is if corn is $6.

Farmers can spend money on this crop to get beyond optimum yields. Marginal acres will be brought into production. The drought in Russia has been followed by La Nina drought in southern South America and La Nina floods in Australia so winter crops have not relieved global supply tightness.

China has not stopped buying. Other countries which have held back waiting for a market correction made a big mistake. The U.S. dollar is up off lows but still cheap enough from a long term perspective not to damage export demand. Rising ethanol prices keep the ethanol industry crushing corn. The USDA lowered feed consumption by 100 million bushel. Some of that may be an exchange with distiller’s grain.

The USDA is behind the curve tracking distiller’s grain which will become the second largest used feedstuff beating out soy meal this year. If feed usage is really going to decline 100 million bushels it is going to be late in the season as first quarter feed consumption was only off 9 million bushels.

Poultry integrators have stopped growth but have not cut production below year ago levels, hog producers can’t liquidate because of contracts and cattle feedlots will stop placing feeder cattle when they run out of them, which they have been working on.

Livestock prices will eventually follow the grains markets to new heights which is why we have not recommended hedges.

Pork, beef and chicken are cheap today. The global consumer already knows that and the U.S. consumer will soon be given an education in the relative cost of commodities.

The grain markets have to stay up to curtail usage, but mostly short term in order to seal the deal on farmers maximizing planted acreage. With tight stocks of all crops, the 2011 production season has never been more critical to producing the supply to physically meet demand.

Weather will be first and foremost pivotal to what happens this year. The caveat on 2011 weather is that it is 23 years since the last major Corn Belt drought.

ISU climatologist Elwynn Taylor identified the 18-year Farmer Benner drought cycle evidenced in 800 years of tree rings. The longest the cycle has ever extended between droughts is 23 years.

Most Corn Belt droughts occurred during La Nina periods. The odds of drought double to 35 percent during La Nina years. Most droughts come into the Corn Belt from the southeast. Dry conditions in the eastern and southern Corn Belt trimmed 2010 production and they have not re-charged subsoil moisture levels.

Predicting the weather is as rough as predicting the markets, but suffice it to say there is much about the coming growing season that will make it interesting. There are no burdensome stocks of anything to buffer weather risk this year.

What would happen if a drought produces sub-trend line yields this year? The ensuing panic as end-users scramble to attempt to acquire supply would send CBOT prices into space temporarily before the markets crash. Some end-users would fail which would damage and destroy a portion of the demand base.

It would be the worst thing that could happen to grain producers thinking long term. Food price inflation would soar worldwide, consumers will scream stung by prices, and politicians would respond with stupid kneejerk political solutions that would damage markets and make recovery harder and slower.

Even now they blame speculators as scapegoats for high prices, ignorant of the supply/demand fundamentals that are discovering commodity prices.

Markets are not going up because of speculation, they are going up because tens of millions of new global consumers with incomes are improving diets, competing with U.S. consumers long lulled into complacency that cheap commodity prices are their birthright as Americans.

Farmers are not to blame for any supply shortages that develop. They will do everything that they can to see to it that end users and consumers get the supply of food, fiber and fuel that they need. They will risk their equity expanding production as the cost of production rises.

New commodity production capacity will be created and prices will moderate. U.S. consumers may soon realize how unbelievably good they had it in the 1980s and 1990s when commodities sold for prices below the cost of production, commodity producers struggled to survive financially, and China had not yet developed its market economy.

We wondered in agriculture, at that time, if the cycle would be as good one day as it was bad then. I think that we can eliminate the direct subsidies now.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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