Floods in the US Midwest have certainly knocked a hole in US grain production, but seasonal conditions from herein will largely determine the extent of damage. Production will be lower due to planting losses, but how much lower will depend on the recovery of the crop and conditions through the crop yield forming phase in July/August.
How much down-side have US crop problems taken out of grain prices?
Reduced US corn production and the rally in US corn values mean that the US will keep more of its wheat and corn at home. We are already seeing the impact of this in greater Japanese interest in our sorghum, and a big Black Sea surplus is now pricing itself into north Asian livestock feeding markets.
Also, importers will be reliant on the Black Sea for a much greater proportion of supplies this year, which may add to market volatility. And now that there will likely be another reduction in all-grain stocks, markets will be more sensitive to potential crop problems in the Southern Hemisphere. Crops in both Australia and Argentina have been sown on less than ideal moisture.
But while we believe US crop problems have taken a big chunk out of down-side risk, we don’t think there is tremendous upside in the near-term unless there are more significant crop problems. Unless the US corn crop deteriorates further, we expect corn prices to fall back to a range between $6.50-7/bu. Wheat has now reconnected with corn and will trade between $1-1.50/bu above corn.
The key risks to grain prices now appear to be a retraction in oil prices or the imposition of restrictive measures on financial investor activity in commodity markets. Given that over 30% of the US corn crop goes to ethanol production and ethanol competes against gasoline, corn break-evens for ethanol production are sensitive to movements in oil prices. Tough measures to restrict the activity of financial investors in commodity markets would lead to some liquidation of long positions and pressure commodity markets.
The message?
US crop problems have now balanced up-side and down-side price risks and it is not worth taking on unacceptable levels of production risk to fix current prices. We already have 30% sold in 2008 and 2009 and this is enough considering the significant production risks that many are faced with. If financial investors are booted out of commodity markets, we are covered to some extent by our 2009 positions.
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Monday, June 30, 2008
Thursday, June 26, 2008
Corn the puppet master
Corn continued to pull the strings across the grain complex this week. Corn went up and down during the week to finish 10US¢/bu lower, at 755US¢/bu. Wheat continues to move lock-step with corn, and gave up 15US¢/bu for the week, to close at 907US¢/bu. With nearly 30% of the US corn crop destined for ethanol production, corn prices will be increasingly influenced by the energy sector.
The weak finish for corn was partly a result of the fall in crude oil prices back from near-record highs, as OPEC said it will increase production and China said that would cut fuel subsidies. US ProFarmer has commenced its annual crop tour and reckons the corn crop could still turn out close to current USDA estimates, at around 11.5 billion bushels (USDA 11.735 billion bu).
The floods have put a number of ethanol production facilities out of action, which will ease corn demand in the short-term – although it will also knock a hole in ethanol reserves. Ethanol is currently priced at levels at which discretionary blending is occurring (which means it is competitive with gasoline).
Wheat quality an issue?
After not having rained nearly all growing season, it now won’t stop raining across the US southern plains, where harvest has been delayed and quality concerns are increasing. Eastern US wheat areas (where all the big rain has been) will now battle disease.
Wheat quality concerns are also being raised by our European contacts. They are hoping for some dry weather in southern areas, so harvest can commence over the next week or two. Some good rain was received in Argentina and in eastern Australian growing areas. At this stage, there is not enough happening in wheat to divert the market’s attention from US corn crop problems. Black Sea wheat is being priced off US corn into Asian livestock markets.
Oilseeds firm
Oilseeds continue to follow corn and oil. China was a big buyer of new crop soybeans, but cancelled some old crop orders. The Argentine farmers strike continues and there were rumours of some export business for Canadian canola. Rain on the East Coast has bought the NSW canola crop another one to two months.
Basis the shock absorber
Australian values largely held onto recent gains, with basis acting as an insulator against changes in international futures and gyrations in the $A. There is very little action in west-coast old crop markets. On the East Coast, higher old crop wheat values are mainly being driven by domestic demand and a potential July squeeze on track and ASX contract.
It looks as though the East Coast will likely be short old crop wheat, with solid demand from poultry and dairy industries and not much surplus supply. Export demand is slow, apart from specialty wheat such as Durum and Soft Wheat.
The weak finish for corn was partly a result of the fall in crude oil prices back from near-record highs, as OPEC said it will increase production and China said that would cut fuel subsidies. US ProFarmer has commenced its annual crop tour and reckons the corn crop could still turn out close to current USDA estimates, at around 11.5 billion bushels (USDA 11.735 billion bu).
The floods have put a number of ethanol production facilities out of action, which will ease corn demand in the short-term – although it will also knock a hole in ethanol reserves. Ethanol is currently priced at levels at which discretionary blending is occurring (which means it is competitive with gasoline).
Wheat quality an issue?
After not having rained nearly all growing season, it now won’t stop raining across the US southern plains, where harvest has been delayed and quality concerns are increasing. Eastern US wheat areas (where all the big rain has been) will now battle disease.
Wheat quality concerns are also being raised by our European contacts. They are hoping for some dry weather in southern areas, so harvest can commence over the next week or two. Some good rain was received in Argentina and in eastern Australian growing areas. At this stage, there is not enough happening in wheat to divert the market’s attention from US corn crop problems. Black Sea wheat is being priced off US corn into Asian livestock markets.
Oilseeds firm
Oilseeds continue to follow corn and oil. China was a big buyer of new crop soybeans, but cancelled some old crop orders. The Argentine farmers strike continues and there were rumours of some export business for Canadian canola. Rain on the East Coast has bought the NSW canola crop another one to two months.
Basis the shock absorber
Australian values largely held onto recent gains, with basis acting as an insulator against changes in international futures and gyrations in the $A. There is very little action in west-coast old crop markets. On the East Coast, higher old crop wheat values are mainly being driven by domestic demand and a potential July squeeze on track and ASX contract.
It looks as though the East Coast will likely be short old crop wheat, with solid demand from poultry and dairy industries and not much surplus supply. Export demand is slow, apart from specialty wheat such as Durum and Soft Wheat.
If you are interested in receiving this information and more on a regular basis, please call us toll free on 1300 302 143 to organise your subscription.
Click HERE to subscribe online or Click HERE for a 4-week FREE Trial
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