Tuesday, July 5, 2011

USDA sends markers sharply lower, so are these prices now the seasonal lows…..?

After much deliberation the Greece parliament passed through their austerity measures. There was now a glimmer of hope there would be a brief period of price stabilisation after three weeks of large fund liquidation. However it wasn’t the macro factors that drove the market lower, it was the USDA which released a bearish acreage and stocks report last Friday that sent the markets into a tailspin. Basically US corn was +100,000 acres above earlier March estimate (at 92.3 million acres), wheat +1.6ma (56.4ma) and soybeans -1.4ma (75.2ma). And the double whammy was quarterly stocks were also above trade expectations at 93.2mmt (corn), 16.8mmt (soybeans) and 23.4mmt (all wheat).

The March-May corn use was much lighter than expected (however still the second highest in history), which showed that demand was finally being squeezed by these record prices. Now there’s more old crop corn for end users to consume and paves the way for 2010/11 corn ending stocks to be higher than anticipated. This therefore puts less pressure on the 2011 corn crop to be perfect. Wheat however was at record usage (+47% compared to last year) after high corn prices drove consumers to offset usual corn consumption.

But like the recent StatCan report, the USDA acreage information was gathered early in June when growers hoping to cash in on high prices, still intended to plant as many acres as possible. Mother nature had other ideas, with persistent rain and cool weather putting an early end to the sowing window. Take for instance Nth Dakota which the USDA only dropped acreage by 2.3ma when earlier last week the states farm agency announced that 6.3ma will go unplanted! Many question marks remain, so they will re-survey growers in the northern plains stats of Montana, Nth/Sth Dakota and Minnesota. These states were originally going to grow 20% of total US corn, and 90% of spring and durum wheat.

It is interesting how the market “buys the rumor and sells the fact”, during the recent US wet weather and so called large amount of acreage that was not going to get planted. These days with modern farming equipment and more horse power the grower only needs a slight opportunistic sowing window and they will grab this chance with both hands; especially when corn was at record prices. However, these crops are not out of the woodwork just yet, vast majority of acreage was put in less then ideal conditions, potentially impacting on emergence and temperatures are forecast to remain cool and wet through to August. This increases the risks of earlier frosts on late maturing plants.

So will we soon see a short term low for all three main commodities, especially since weather premiums are no longer existing in the marketplace? The market thinks so, especially with anticipated aggressive buying emerging. China for instance just purchased 1.14mmt of corn to rebuild their own stocks. Currently both in Australia and US prices have reached their seasonal lows, this is probably a good thing as the market does not want to destroy the demand base. The critical corn pollination period from mid July to mid August, always has the market on edge and if the crop survives this then corn prices will decline and drag wheat and oilseeds with it in the later part of the year.

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