Posted on March, 27, 2023 at 02:25 am
A tight grain supply will cause prices in 2023 to be volatile, experts say, but grain prices don't affect consumer prices as much as people think.
"Only about 15% of retail food prices at the grocery store are represented by raw commodity costs," said Scott Irwin, an agricultural economist at the University of Illinois.
"This means other factors are driving food price inflation, such as wages and energy costs," Irwin said. Raw commodity prices at the farm level have contributed to food price inflation but not nearly to the degree as the previously mentioned factors."
Irwin expects price volatility to continue in 2023 given the ongoing war in Ukraine and tight global grain markets.
Joe Janzen, an assistant professor in the department of agricultural and consumer economics at the University of Illinois at Urbana-Champaign, agrees with Irwin.
"We have seen almost three years of tight supply and demand conditions for corn and soybeans. When supplies are tight, prices are high, and markets are more volatile," Janzen said.
"Prices will have a downward bias," Irwin said. "The risk factors in my mind are weighted toward lower prices compared to today's levels."
Current price levels with old-crop corn above $6 per bushel and soybeans above $15 per bushel are much higher than long-run average levels. In these conditions, Janzen said, every bit of news about changes in supply and demand tend to have a bigger impact on price.
Geopolitical events like Ukraine, extreme weather in South America and turmoil in China affect balance sheets and how much corn and beans are left in the country, said Seth Coats, a grain originator and safety manager for Western Grain Marketing in Virginia and Arenzville.
"We have done a really good job of chewing through the bushels we have in the United States. We had a great program last year. Ethanol used a lot. We saw high demand for corn. Southwest had drought and when they did not produce, the rest of the country filled the demand and it went to where there was no corn," Coats said.
"The market is in the process of lowering its expectations for corn and soybeans in 2023. Some of this is based on an expected return to average yields and production in the U.S. Even though Illinois produced large crops in 2022, total U.S. yield and production was down last year for both corn and soybeans," Janzen said.
"Lower prices in 2023 than in 2022 is mainly a reflection of the fact that high prices tend not to last forever. Eventually production responds and prices return to more normal levels," Janzen said.
Several factors drive grain prices and weather is always a major factor. For the first time since 2020, the entire state of Illinois is free of drought, according to a February report from the U.S. Drought Monitor.
"We expect U.S. production to rebound in 2023, but another significant weather event like the drought seen in the Kansas, Nebraska, and elsewhere in 2022 could change that forecast," Janzen said.
"Export markets and South American production are the other major drivers at the moment. Brazil is expected to harvest a large crop. Meanwhile Argentina is suffering from its worst drought in 60 years," Janzen said.
"In February, everyone was expecting a dry year. Now we are eyeing delayed planting because of wet fields. The eastern corn belt looks great. Oklahoma in rough shape," Coats said. "But we look to have the moisture to have a decent planning season. We are at the mercy of Mother Nature."
The prospect of greater competition for U.S. grain in major export destinations like China has caused some concern about limited export markets, especially for corn.
Fears about the Ukraine-Russian war continue to weigh on prices and an escalation in the conflict could have a major impact on global markets.
"Corn and wheat, the two commodities most important in terms of Ukraine's exports to the world, have returned to price levels seen just before the war started last February. Many of the worst fears about Ukrainian production and exports were not realized; Ukraine has muddled through a difficult situation and remained an important source of the world's corn and wheat supplies," Janzen said.
"The effect of war in Ukraine is hard to assess. The difficultly is the risk of the war escalating and spreading beyond Ukraine. The market has to factor that into prices," Irwin said.
Even with unpredictable grain prices, current University of Illinois crop budgets suggest profit margins are positive in 2023, though lower than 2021 and 2022. Janzen and Coats both advised farmers to take profit when it is available.
"Farmers have been blessed with great yields and great prices for the last two years, getting between $6 and $7.50 for corn. All sales were above cost of production. This year, there is a little sticker shock with input costs, equipment and other costs of production rising. Now it is a little closer to break even. It's hard to sell $5.50 corn when you've sold for a dollar higher," Coats said.
"We are approaching 2023 with a focus on break-evens. We are telling them to know their costs and don't be afraid to make any sales above those break-even levels. Use crop insurance as a safety net. Make some early sales as a guard against what could happen throughout the year is advisable," Coats said.
"Farmers can only take advantage of the current market situation by being proactive and pricing some portion of their expected 2023 production ahead of harvest," Janzen said.
"Prices are historically high at the present time and crop insurance represents an unusually high safety net this year. I lean toward having more downside price protection than a farmer might normally carry," Irwin said.
The bottom line is events will cause prices to fluctuate.
"We're a long way from putting a crop in the bin and a lot can happen between now and then," Coats said.
Source: My Journal