‘Fear premium’ drives crop prices higher

Crop prices in the United States would be far lower than today’s levels if they were based strictly on supply and demand fundamentals, says an analyst.

The United States Department of Agriculture is forecasting 34.54 million tonnes of U.S. corn ending stocks in 2022-23 or a 9.3 percent ending stocks-to-use ratio.

History shows that prices have ranged from US$3.60 to $7 per bushel at that ratio, with a midpoint of $5.30 per bu., DTN lead analyst Todd Hultman said in a recent webinar.

But cash corn prices were trading at $7.79 per bu. when the USDA released its latest supply and demand estimates report.

“Obviously there is a lot more bullishness in the market than can just be explained from the supply situation that USDA currently estimates,” he said.

“I put that out there as kind of a fundamental anchor to help us realize how much fear premium and how much weather premium is in the market.”

The USDA is forecasting 8.43 million tonnes of U.S. soybean ending stocks or a 6.8 percent stocks-to-use ratio.

At that level the historical cash price target would be $12 per bu. but the price at the time of the report was $15.72 per bu.

“There is a lot of outside bullishness really helping pump that price much higher than you would typically see in this particular supply situation,” said Hultman.

The drought in Brazil and extremely tight world vegetable oil suppliers are two factors pushing prices higher.

In wheat, the contrast between where cash prices should be based on fundamentals and where they actually are is the most pronounced.

The USDA is forecasting 16.84 million tonnes of U.S. wheat ending stocks or a 33 percent stocks-to-use ratio.

That should compute to a cash price for hard red winter wheat of $5.80 per bu. based on history. But DTN’s current national average price is $11.47 per bu., almost double the value that history would suggest.

The price is being influenced by drought in the U.S., the war in Ukraine, Russia’s unpredictable policies, hot and dry conditions in Europe and a heat wave in India.

“All these factors are adding to the bullishness that we see in wheat this year,” said Hultman.

Tags: U.S., corn, prices, United States, soybean, ending stocks, wheat, crop