The Growing Problem in Agricultural Markets - WSJ

The Growing Problem in Agricultural Markets - WSJ

A government report last month of record crops startled agriculture markets. Tuesday could bring the first in a series of aftershocks.

Corn prices have plummeted 16% and soybeans by 7% since the Department of Agriculture said Jan. 12 that American farmers produced more of each than ever before. Many observers expected a lower forecast because they thought the crop would suffer due to bad weather, but instead the market faced a surprise glut.

There may be more on the way. The USDA is due to release its estimate of world supply and demand Tuesday morning. Analysts already anticipate a bumper crop from Argentina and Brazil, including at least 65 million tons of soybeans from Brazil. That would be about 14% larger than the prior year's production.

If the latest number is even larger than expected, that could deepen or prolong the recent price drops. If it is on the lower end, "the markets could react with a bounce," said Terry Roggensack, an agriculture specialist at the Hightower Report in Chicago. (The report also marks the first official reading on orange-crop losses after freezing Florida temperatures last month.)

Even absent new shocks Tuesday, there is more potential turmoil ahead. When it issued the surprising report, the Agriculture Department also said there was "significant unharvested acreage" of both crops. It pledged to resurvey farmers to see what they were able to harvest amid wintry weather. The unusual update is due March 10, and it has caused "a greater level of uncertainty" about the January report, said Richard Feltes, an analyst at MF Global.

On March 31, the market may get a sense of how U.S. farmers are reacting to the glut and the price drops, when the USDA says how many acres it expects them to devote to various crops this spring. That is a roadmap to what growers think they can produce profitably, and could therefore hint at the glut's staying power.

All this takes place against the backdrop of booming global population and rapid growth in the developing world, which are creating great change on farms world-wide that feed those more numerous and increasingly prosperous mouths.

The recent crop sizes and price moves show agricultural markets adjusting to the changing terrain.