Tuesday, July 8, 2008

The US corn bank is nearly bust

While all the attention has focused on how the sub-prime mortgage market is sending the US banking sector to the wall, the failure of a lesser known US bank – the US corn bank – will have far deeper ramifications for the international grain trade.

Last year, the US corn crop acted like a bank to the global grain importers. As other grain prices rose, importers turned to plentiful supplies of relatively ‘cheap’ US corn. The US exported over 70mmt of corn to destinations far and wide – to put this into perspective, the world wheat trade in total is only just over 100mmt. Australia felt the impact of this in Saudi – our premium feed barley market – where US corn displaced some barley.

A senior figure in the international barley trade once told ProFarmer that Saudi would never use anything other than corn – never say never…

But this year, the tide has turned and the US corn bank is nearly bust. US corn prices are rising to keep its corn at home. Prices should remain high until they know how much the crop will put in the bank and how much they can lend. Currently, US corn is trading at over US$300/t FOB – around US$40/t higher than SRW wheat at US gulf ports.

Global importers will not be able to bank on the US corn crop meeting their needs and will to ‘borrow’ from a larger wheat and European coarse grain crop to help fill the void. But this has even far greater significance than at first glance.

In effect, at least in the coming year, the lender of last resort is gone and global importers will now be reliant on much less stable sources of supply – Black Sea is notoriously unreliable and who would lend against southern hemisphere crops at the moment? Australia, Argentina and the Black Sea are expected to supply around 44% of the global wheat trade this year.

The situation in the global oilseed trade is even more tenuous. This year South America has been penciled in to supply around 50% of the world soybean trade. But farmers in Argentina have been battling the Government for the right to export beans.

The political situation in Brazil seems stable now, but is it a matter of time before rising food costs and unrest place political pressure on the Brazilian Government to keep more food at home?


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