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Written by Cinthia Murphy  |

September 07, 2012

AgResources' Tierney: Demand Trumps Harvest Pressure

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Strong emerging-markets demand should temper any correction in corn and soybean prices, agricultural economist says.

[This interview originally appeared on IndexUniverse.com and is republished here with permission.]

Agricultural commodities have been a hot spot of price action this summer as one of the worst droughts in recent history trimmed yield potential for corn and soybeans across much of the U.S. But as we head into harvest, prices should correct a bit to the downside, but only a bit, says Bill Tierney, chief economist at AgResource Co.

Tierney, who will be speaking at IndexUniverse’s Inside Commodities conference this fall, told IndexUniverse Correspondent Cinthia Murphy that even harvest pressures will not be enough to offset the fact that emerging markets demand—especially that coming from China—continues to outstrip global supply.

Murphy: This was the year of the drought that led to record-high corn prices as well as high soybean and wheat prices. Why aren’t droughts more built into crop prices early in the year? It seems we get some sort of weather scare every year and rally on it. Doesn’t it seem logical?

Tierney: What we had this year was a stealth drought. We had near-record dryness going into spring planting, but a lot of people interpreted that—and correctly so—as a good thing for quick planting. Now, quick planting is strongly associated with above-average yields. The USDA had actually raised its yield projections in May because of early planting. That dryness can be a precursor to quick planting, but also to drought, as we saw this year. So there’s a risk premium that’s built into commodities prices for weather uncertainties, but at some point, it’s hard to predict what the weather will really do to the crop.

Murphy: What’s the demand side of this equation looking like?

Tierney: Prices for agricultural products are at the high end of a historical range, but a lot of the rise in agricultural commodities prices in recent years has been tied to the rising biofuels mandate that’s topping out this year. We are not going to be crushing as much corn anymore for ethanol or soybeans for biodiesel. This is the first year, in fact, when the corn grind for ethanol is going to decline because the biofuel industry’s growth mandate is slowing down, its infrastructure is already in place.

But we don’t see any indication right now of a rationing of soybeans in the future. In fact, we already have record export sales in the books—as much as 65 percent of the sales are already in the books for next year and that’s before the crop is even here. In corn, there’s also no indication that demand will contract enough to alleviate the tightness in pipeline supplies.

Murphy: Should we expect to see a price slump during harvest? That seems to be the norm, right?

Tierney: We should see some harvest slump, but a lot will help keep prices supported such as concerns that the Black Seas will restrict grain exports, and that South America is having some trouble with its planting conditions.

China could also pull a number of different levers that would impact the commodities markets. It could decide to import pork or to slow down the pace of its soybean purchases, which are at a record high. It could also lift controls on vegetable oil prices that have imposed losses on crushers, or decide to build up its corn stocks after it imported record amounts of corn this past year.

All that’s to say China could surprise the market in many different ways that would help offset the traditional harvest pressure on prices.