Chicago, 31 January 2011

The main take away from the 2011 Reuters grain market poll is that relatively high crop prices look here to stay. But the poll also reveals startling variation in crop price projections among the analysts surveyed, which either suggests that high price volatility may be in store on all fronts, or that U.S. grain market forecasters simply don't know what these markets are going to do.

Of all the major food commodities featured in the poll, wheat's likely price direction appears to be the most hotly disputed. The difference between the highest and the lowest price projection for spot prices on December 31, 2011 is a whopping $4.50 a bushel, or more than 53 percent of today's current spot price of roughly $8.35 a bushel.

So wheat prices either go sharply higher or sharply lower from here, depending on who you talk to. Given the social unease spreading across North Africa over rising food costs, and the backdrop of drought-plagued global crops in 2011, such variety of opinion over the fate of one of the planet's main food staples is to be expected.

And when you throw in the lingering concerns over the emerging U.S. and Russian winter wheat crops, as well as the fact that large spring wheat plantings in the U.S. look highly uncertain given the flooding potential in key growing areas, it is not surprising there's a firm bias overall to wheat price projections for the coming year.

What may be considered surprising is the way advisors split over their projections. In general, those advisors that are tied closely to growers of wheat in the U.S. tended to have price projections on the lower end of the range, while advisers typically more aligned with investors and traders seemed to favor the upside.

This split may be due to the fact that those advisers who primarily worked with growers viewed the wheat story as one of supply (or the lack thereof in recent months), while those who dealt with commodities as an asset class focused more on the sustained strong demand for those instruments.

In addition, a strong component of the commodities sales pitch at investment banks and brokerage houses centers on the need to feed the planet's rising population, which tends to color market projections of those institutions accordingly.

Altogether, the wide discrepancies in wheat projections reflect the great uncertainly plaguing that market currently, and that look set to underpin prices for the coming months at least until spring wheat plantings in the U.S. get underway.

Beyond then, the extent and state of the crops across Russia and Eastern Europe will be closely monitored. Any hints at a repeat of the problems that impacted those crops in 2010 will likely steer wheat prices sharply higher again. But if conditions appear to be nurturing ample crops across key regions, a softer price bias will likely take hold over the latter half of 2011.

BIG CORN CROP ON THE CARDS

Judging by the fact that a majority of corn price projections call for spot prices to be lower by year's end than they are currently, most analysts polled seem to be anticipating hefty corn plantings in the U.S. this spring.

Interestingly, lower soybean prices are also widely called for, even though the soy market would likely lose acreage to allow for any notable increase in corn output this year. That said, it is clear that some firms expect soybeans to become more competitive towards corn than they are currently in a bid to fend off production losses this year, so an interesting tussle between those crops looks set to unfold over the coming months as each state their case for higher production on U.S. soil.

Of course, with the first seed of either crop not likely to be sown for more than two months in the Midwest, there is still a lot of uncertainty to contend with before more accurate projections can be made. And once in the ground, Mother Nature plays a more significant role than any other factor in crop size determination. Still, given that the average projection for both crops remain well above longer term averages (the lowest corn price projected - $4.50 a bushel - marked that commodity's high from October 2008 until August of 2010) it is clear that analysts in general are expecting corn and soybean values to remain solidly entrenched near their currently - and historically - high levels for much of the foreseeable future.

And after last year's corn crop underperformed on the yield front relative to early season expectations, it is clear that analysts are projecting both corn and soybean markets to be able to remain solidly supported this year until both crops are 'made' and close to harvest.

The firm price projections also suggest that the demand side of the equation is expected to stay strong, even in the face of sustained high values. These assumptions are likely supported by the prevailing mood in North Africa where riots over food shortages suggest the potential for increases in crop purchases from that region.

In all, while the analysts polled seem to have much to disagree over with regard to the wheat market's outlook, they seem to agree that corn and soybeans will remain well supported throughout the upcoming growing season and beyond irrespective of the acreage split between them.

Ends --