Bearish assessment by US of global crop supply and future demand
But a major factor overlooked by market bears is the strong likelihood for overall crop demand to climb notably from current levels in response to any further declines in price.
USDA has pencilled in total demand for the major crops to climb around 1.75% from last year to a record 2.53 billion tonnes. But that growth rate is less than half of that seen the year before and is a full percentage point below the recent five-year average.
Amid all the recent projections for record-sized crops in South America and more lately the US, it is easy to understand why market participants have become obsessed with trying to gauge the overall amount of global crop supplies for the 2014/15 season.
The production numbers are impressive: Record world corn production of 981 million tonnes, record world rice production at 480 million tonnes, and record world soybean production at 300 million tonnes. Add in the second-largest wheat and rape-seed crops in history, along with one of the largest projected sorghum harvests in years, and it is easy to be convinced that ample crop supplies are on the way. The inventories projections back up that assessment, with the combined total of those crops expected to amount to more than 577 million tonnes at the end of the crop year, which is the second-largest stockpile in history.
What’s more, demand growth tends to increase at a faster pace than output during periods of price weakness, as production tends to pare back slightly at a global level if prices remain under pressure for any extended period.
Clearly, we’re still in the midst of an expansion phase in terms of crop production as US crops are only just beginning their growth period and South American growers are still months away from planting their next crops.
But if crop prices continue to grind lower between now and the US harvest, it’s very likely that overall planted area in South America and other regions will start to decline.
At the same time consumption growth can only be expected to grow amid declining crop prices, especially if meat consumption and demand for biofuels continue to rise across emerging market economies.
With many traders still preoccupied with the prospect of a record-large crop haul this year, it is hard to drum up bullish enthusiasm for crop markets. But once the full extent of new production has been fully priced in, market focus is likely to shift towards the demand side of the equation, which has more often than not surprised to the upside whenever crop prices have trended lower.
