The year 2011 is going to go down as one of extremes for the commodity market. Corn and soybean values rallied to record high values during the year due to concerns over global supply and demand concerns.

 

The United States witnessed record demand for its ag products at times, and nearly record low demand at others. The same is true for yields, as once harvest was under way, producers reported a wide variety of yields, sometimes in fields that were right next to each other.

According to the World Meteorology Organization, 2011 is going down as one of the warmest on record. This heat came late in the growing season, and did reduce yields in several key grain-producing regions. What concerns forecasters is that 13 of the warmest years on record were all within the past 15.

There were several other weather factors that impacted the United States last year, which led to a record $52 billion in losses.

The state of Iowa has just completed one of its driest stretches in history. Between July and Dec. 1, the state only received 10.9 inches of rainfall, 40 percent less than normal. By Dec. 1, nearly 75 percent of the state was experiencing drought conditions. In previous years with limited rainfall over this time frame, drought did affect the following year’s grain production.

Several other states are also experiencing ongoing drought conditions, mainly in the Plains and Deep South.

Another record set in 2011 was the price paid for farm ground. This happened when a 74-acre parcel of land in Hull, Iowa, was sold for $20,000 per acre. Farmers were able to pay these elevated land costs in 2011 from a combination of high commodity values, low interest rates and minimal leveraging.

The question, looking forward, is if farmers will continue to pay these high asking prices, or if a correction in commodity values will force land values down.

U.S. grain farmers experienced something in the market this year that is seldom heard of: A tightening basis during the harvest season. Harvest was staggered out this season as farmers started out on corn, then took soybeans out, then returned to corn.

This relieved congestion at grain terminals and prevented basis from slipping. An increase in on-farm storage also prevented heavy grain movement during the harvest season.

Many grain processors started the harvest season empty in hopes of large sales and deliveries, and when these did not materialize, they were forced to push bids for coverage. This was especially true for ethanol plants that went into the harvest season with minimal coverage to begin with.

One of the greatest unknowns in the market, moving forward, is how much traditional feed grain demand will be displaced with alternative grains. Feeders have been using large amounts of distillers grains in their feed rations, but rising costs have made that product’s use unprofitable in recent weeks.

We are still seeing a large amount of low-grade wheat making its way into the feed market, though, and likely will for the remainder of the marketing year. Not only is this taking place in overseas markets, but in domestic ones.

Another factor that will impact the commodity market this coming year is the outside markets, much as it was last year. This is especially true for the global economy. There are concerns of a total failure of the European Union, and possibly a decline in China’s economic status. If even just one of these does in fact face an economic crash, it will likely devastate global commodity demand.

Other influences that should be closely monitored this coming year are global weather patterns, demand for U.S. grain, the rewriting of the farm bill and how much competition the United States sees from South America in the world market. Trade will also keep a very close eye on what impact the elimination of some renewable fuel tax credits will have on commodity demand, mainly corn.

Karl Setzer is a Commodity Trading Advisor/Market Analyst at MaxYield Cooperative. His commentary and market analysis is available daily on radio, in newsprint and on the Internet at www.MaxYieldCooperative.com

The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.