Commodity Insight: Grain prices living on borrowed time

In the absence of weather-related problems this growing season in the United States, grain prices are now at levels that are simply unsustainable.

Grain prices have rallied sharply since September 2020, with the line of least resistance lower rather than higher.

In September 2020, U.S. corn futures were around $3.64 a bushel, but in the past week kissed $6.82 a bushel. U.S. wheat futures prices in September 2020 were trading around $5.35 a bushel, but in the past week hit $7.90 a bushel.

Soybean futures in September 2020, traded around the $9.67 level, but hit $15.53 this week.

Soy meal was at $319 in September 2020, but in recent days rose to $506. Soy oil that was around the 33-cent level in September 2020 rose to 61 cents a few days ago, but a month ago was north of 70 cents.

My concerns are about high-priced grains, not high-priced livestock. Using the same measure for livestock here is what has been seen:

• In September 2020, October live cattle were at the $104 level, but this week kissed $165.

• June lean hog futures in September 2020 were resting at $66, but this week touched $105.

• U.S. feeder cattle futures in September 2020 were near $1.39, but this week hit $2.11.

But, as I stated above, my immediate concern is about elevated values for grains, not livestock prices that could have more room to run on the upside. U.S. livestock values are not overvalued similar to the grains.

A big drag on all markets — grains, livestock, all other commodity markets, as well as stocks and bonds — is the Federal Reserve lifting U.S. interest at the fastest pace in 40 years in a battle to fight inflation.

The Fed has stated several times the past few weeks that interest rates will remain elevated for all of 2023 with further rate hikes promised. The Fed hikes rates to slow economic growth and place downward pressure on all markets and prices.

From Bloomberg News immediately following the last Fed meeting that produced a rate hike: “(Federal Reserve Chairman Jerome) Powell acknowledged that the U.S. economy is now in an era of ‘disinflation’ with price pressures cooling. But he emphasized that more data is needed before the U.S. central bank is able to declare victory, without specifying exactly how many more months of data it would take for officials to be convinced that inflation is on the right path. Powell said, ‘Even so, we have more work to do.’”

There is no doubt inflation in the United States and across the globe is on the wane and deflation is gaining momentum. Moving forward, the markets most likely to face further downward pressure are grains.

With record-setting crops coming from Brazil and U.S. farmers poised to plant “fence row to fence row,” the world will soon be enjoying ample to burdensome supplies of grains. My downside target for corn is $5 a bushel and for soybeans it is $12 a bushel.

Fundamentally, U.S. grain prices appear to be living on borrowed time. By any measure, prices are quite elevated from where they were as recently as September 2020.

Plus, history shows that grain prices seldom remain elevated and locked in a bull market for more than two to two and a half years.

As of now, the grain complex and prices have been grinding higher for more than two years, which again suggests the complex is living on borrowed time.

Also keep in mind the historic drought that plagued South America in 2021-2022 is unlikely to be repeated anytime soon. In fact, with Brazil expected to harvest a bin-busting record grain crop this year, history shows next year could be the same.

In my wildest dreams I cannot envision a scenario where U.S. grain prices that are now historically high priced having rallied sharply the past two years can do anything other than head lower in the months ahead.

In summary: the current grain market is long in the tooth. Inflation is easing and disinflation is on the rise.

The Fed is expected to hike rates further moving forward. Slow growth is starting to show up in countries that buy U.S. grain and American exports are weakening.

Grain producers should be willing hedgers. Grain traders should avoid the long side of the ledger.

Grain prices in the United States are now at levels that are simply unsustainable.