Monday, October 3, 2011

Strong rationing sends markets sharply lower.

After a couple of weeks of strong macro related market pressure, the commodities market was again heavily sold off. Albeit, this time was on a strong fundamental aspect. The USDA released data indicating that old crop stocks were higher then what the trade had anticipated. Corn was the most bearish, leading the charge and finishing a 40c/bu limit down for the first time in 2011. Old crop stocks were as much as 4mmt above trade estimates at 28.6mmt. However food for thought was last years Sept stocks report offered a similar shock. But initially large inventories turned out to be a knock-on effect of an early corn harvest and values soon started their long twelve-month rally.

Corn stocks have been falling to near historic lows for most of the year, helping to push prices to all time record high levels over the last couple of months. Although previous strong demand has contributed to driving corn prices higher, it seems that higher corn prices has finally sharply rationed demand. With more then a third of all US corn going to ethanol production, it looks like demand can be quickly rationed compared to livestock consumption.  However the flip side is that demand can quickly kickback into gear when price allows. Although stocks are still tight, with supplies at their lowest level since 2003 and inventories currently 34% below a year ago they are not tight as they once were..!

Wheat production numbers were considered mildly supportive, but were offset by bearish news for old crop wheat stocks and strong price pressure form corn. Stocks came in higher then expected, indicating that domestic feeding wasn’t as high as expected and slow export demand. However spring wheat production came in even lower than expected (12.5mmt), prompting only slight declines on MGEX trading, with the current premium over CBOT now at 200c/bu. Durum stocks came in at 1.4mmt, below trade estimates and as much as 50% below last years level. Total wheat stocks was 54.6mmt, 9% less then last year.

The report was considered slightly supportive for the soybean market with Sept stocks pegged at 5.8mmt, which was 272kt below trade expectations. However, talk of better than expected yields in the Midwest plus dry weather in the forecast into early next week has traders talking about increased harvest selling pressures ahead.

Southern states of Victoria and South Australia have bared the brunt of todays price reaction, with new season APW prices coming off $17/t. Northern port zones have feared better coming off $9 - $13, while over in the West prices have decreased $12, with basis improving. However it was a holiday in NSW and SA today (Viterra, Elders and Graincorp), so we will see tomorrow how the entire trade responds.   

With the widespread rains in September, we may start to see domestic prices distancing itself more from international futures. However with the dollar declining to its lowest level against the greenback since last December, basis has held steady over the last week.

So where from here..... The short term view is the recent price correction is we needed to see after all commodities rallied strongly over the last six months. General consensus is maybe we have seen the lows priced in, and now the trade is waiting for the market to consolidate around these levels and build up again from here. If climatic conditions allow for average yields globally next year, then there should be plenty of grain around. If we get any hiccups (and probably Sth America is the most vulnerable for the market over this period being La Nina still lingering), then the market will pretty quickly build back in some risk premium about supply concerns.


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