Corn, Soybean Pricing Continues Driving Equipment Sales
With farm machinery sales highly dependent on grain commodity
pricing, the increasing demand for corn and soybeans provides a
steady influence on the North American demand for row-crop tractors
and combines during the next few years.
Food, Biofuels Drive Corn Pricing. In the JP Morgan Global Commodity
Strategy Commodities Outlook: 2010 & the Medium Term report issued in
December, Lewis Hagedorn, commodity analyst, expects the demand for
corn to increase over the next 5 years as two ìbullish storylines
These include the diversion of increasingly large supplies to biofuel
production in the U.S. and the continued growth of protein — food —
demand in many emerging markets. As a result the corn market has
enjoyed one of the strongest demand stories of the agricultural
complex in recent years, says Hagedorn.
He also points out that ethanol mandates will continue to increase
over the next few years. ìThis steady and presumably largely-
inflexible source of demand appears likely to keep corn supplies at a
relatively low level for the foreseeable future,î he says. Despite
the continuing pressure to increase production, Hagedorn adds that a
gradual decline in inventories toward threshold or ìcomfortî levels.
This means prices are likely to rise in the medium term.
But there’s a downside to improving corn yields.
"Improved corn revenues — and more acreage — can come either through
higher prices or yield gains. How readily a dramatic increase in
yields can be achieved is a matter of continuous debate within the
industry," says Hagedorn. "Given repeated assertions within the
industry that this rate of growth can be further improved, it is
worth noting that one of the downside risks to our long-term view for
corn prices is the possibility of significantly better than expected
yield growth as technological gains accrue," he adds.
Exports, Competition Drive Soybean Pricing. Increasing export demand
and low inventory carryover provided soybean growers with fairly
healthy returns in the last year. But the growing competition from
South America will be a major factor in how they fare in the future.
In the short term, Lewis Hagedorn, commodity analyst for JP Morgan
continues to view 2010 price prospects ìas largely neutral amid a
rebuilding of U.S. and global inventories.
"Looking beyond the next crop year, the increasingly strong pull on
U.S. acreage exerted by corn in coming years suggests a commensurate
decline in soybean production. The extent to which this outcome
either supports or leads to higher prices will hinge on three factors
with soybeans," he says.
• Rate of yield growth in the U.S.
• Expansion in productive area and crop sizes in South America
• Magnitude of future Chinese demand growth.
"Our 5-year baseline suggests that the soybean market can plausibly
remain adequately supplied while simultaneously satisfying continued
demand growth," Hagedorn says.
"In such a scenario, prices remain above historical norms but
relatively flat throughout the period and well below recent record
highs." The analyst says that the events of 2009 probably won’t have
a long-term impact. This is due to one of the strongest fundamental
trends of the past decade — the rise of Brazilian and Argentine
soybean production and gradual eclipse of the U.S. in export market
"The ability to comfortably accommodate increasing demand for corn
and soybean products in the U.S. increasingly depends upon an easing
of the present soybean export burden," Hagedorn says. These factors
will play a major role in the sales of ag equipment over the next 5
years or longer.
Source: Ag Equipment Intelligence
Source: JP Morgan