Grain usage for food or fuel..?

Continuing a similar theme from last weeks report, should food be used for fuel or for human consumption? The UN Food and Agriculture Organisation (FAO) food price index has surpassed the previous high set in June 2008. With world grain prices and especially corn (the major ethanol crop) continuing to rise, there will be some uneasiness what the future holds for the US ethanol and corn industry.

Henry Ford originally designed his model T to run on pure ethanol (however the vast aquifers of newly discovered oil were soon substituted), but it wasn’t until the last 10 years that crops grown for ethanol has readily gained momentum. Australia has lagged behind the US and their powerful farm lobby with tax credits and forcing ethanol mandate levels. The major crops our fledging industry absorbs is a small portion of sugar and sorghum in QLD.

Based on data from the USDA, in 2001 only 7% (18mmt) of U.S. corn went for ethanol. By 2010, the ethanol share was 39.4% (127mmt) out of total U.S. production of 316.2 mmt! And with corn ending stocks at historical tight levels, these are big numbers for critics to ignore. In short this new demand for corn is a large factor in creating increased prices for grains over the last couple of years.

The elements are in place for another big jump in corn prices this spring, if farmers in the US don’t plant an extra 5 million acres of corn above the 88 million they planted last year. Early indications are that farmers may add only 2 - 3 million acres nationally this May/June, largely because high prices for soybeans provide little incentive to plant more corn.

The ethanol industry is not with out its critics, The Wall Street Journal last week described as "immoral" the renewal of the 46 % gallon tax subsidy for ethanol, and US government a week ago expanded the blend ratio of ethanol in unleaded petrol from 10 % to 15 %. This damage coincides with a growing consensus that ethanol achieves none of its alleged policy goals. Ethanol supporters claim the biofuel reduces U.S. dependence on foreign oil and provides a cleaner source of energy. However US oil imports have increased.

At a time when traditional exporters have experienced supply issues, critics are arguing that it makes no sense devoting scarce farmland to make a fuel that exists only because of taxpayer subsidies and mandates. If food supplies tighten and prices keep rising, critics argue such a policy will soon become immoral but more importantly to what determent to the grain grower who has been enjoying these boom in prices?

Food Inflation the new canary in the coal mine.

Over the last week, we have seen images on the news about the political tensions and riots in Tunisia with poverty, corruption and political repression having fueled a popular uprising and finally toppling the government. Other countries have noticed with concern and has prompted their governments into buying prompt shipments of wheat if not for immediate consumption but to stockpile and to quell higher food prices. The need for food security, especially in countries facing rising prices, will keep a fire burning under the agricultural markets for some time. Tightening supplies of quality wheat at a time when global food prices hit a record high last month has sparked a scramble for wheat. With US sales of wheat last week topping 1mmt, compared to the previous weeks sales of 175,000mt.

And what bigger country then China which needs to tackle food inflation and keep the masses content and fed. China, which needs to import increasing volumes of protein rich food to feed its swelling urban ranks. Led by corn shipments from the US, Chinese grain imports in 2010 surged as the rise of large-scale livestock farms and a shift in diet patterns dented Beijing's policy of self-sufficiency in the sector.

China imported 1.57 mmt of corn last year, an 18-fold increase on year. Newswires are reporting that China may import 1-2 mmt of corn this year, a sharp increase from 2009, when only 83,000 mt was imported and only 49,000mt in 2008! Higher demand in 2011 is coming from the rise of large-scale hog farming to feed China's growing appetite for meat. Wheat imports were also higher last year, rising 36% to 1.2mmt in 2010. Just last week, 200,000 mt of Aussie FED1 was sold to Chinese buyers, with potential for a lot more tonnage to follow. Soybean imports last year reached a record 54.8 mmt, and with sales last week of 11.52mmt from the US, 2011 looks like a big year for soybeans.

The Chinese government is in the middling of a juggling act, on one hand they have to increase the supplies of food to keep domestic prices down and the masses fed while on the other hand have to tighten the supply of funds (which impacts potential future grain purchases) to slow runaway inflation which continues unabated.

Six months of bullish new and counting..!

The majority of the Australian 2010/11 harvest is now winding down, albeit some pockets in NSW/SA still being held up by wet weather, and the majority of southern Victoria just getting started. So with the market digesting six months of continued bullish news, what will then further ignite grain prices in the first half of 2011?

Last Thursday the USDA released a number of reports containing very bullish news for corn and soybeans (there was not one bearish factor in the report!). As a result the USDA sent a clear message ~ remaining 2010-11 corn and soybean stocks must be rationed and both markets must fight for acres in 2011 (especially corn with US stockpiles at 15 years low and amazingly down 25.4mmt compared to last year!). This suggests prices are headed higher and will set the tone for international markets for the first half of 2011.

For more in depth analyse of the report check out this week’s Profarmer newsletter, however one factor that still could push prices higher is a stronger La Nina on South American and US growing season conditions. The USDA trimmed 2011 Argentine soybean production moderately with most private forecasters already severely cutting their estimates. If dry conditions spread north to Brazil and into US (as is the pattern of a major La Nina event), current production and stock estimates will be severely challenged and panic buying will again arise.

So all eyes will be closely monitoring the weather events unfold in South America over the next couple of months and seeing if the La Nina dry weather pattern strengthens and if so the flow on effects for Brazil and the US.

So what does US corn prices mean for my weather damaged downgraded wheat stored on farm? The trade is reporting overseas Australian feed wheat demand is picking up from Asian buyers, competing against US corn that traditionally is sourced for their stock feed rations. So if traditional US corn importing countries start rationing their demand due to increased prices, and make the switch to the surplus Australian feed wheat, there will be some gradual recovery in feed wheat prices once local harvest pressure eases.

Canadian Spring Acreage Tussle

Profarmer has recently returned back to these sunburt shores (or should I soggy shores) after spending the festive season in cold wintery Canada. As well as watching some live ice hockey I had the opportunity to visit some colleagues in Winnipeg. I was assured that I’ll be experiencing -30 temperatures but luckily for me the mercury only got down to -15! Like growers in Australia, the 2010 western Canadian marketing year could be summed up as wet. Record rainfall in their key April/May planting window especially in key producing areas of Manitoba, Saskatchewan and Alberta frustrated growers by not allowing them into paddocks due to the excessive wet. If the ideal planting window is missed it usually causes great concern, as the onset of cold wet weather in autumn comes in quick limiting harvest. However, looking forward to 2011 the word on everyone’s lips is what will be planted come April/May?

With the current canola price at very attractive levels (Winnipeg Nov futures up CAD$15.50 in today’s trading) the intended canola area is estimate between 19 – 20 million acres; this is a sharp rise considering only 16.5 million acres was planted last year. Our Profarmer Canada colleague estimated Canadian gross margins (calculated using current production costs against new crop prices) certainly backed this up at. With Canola at C$200 per acre, red lentils at $185, spring wheat at $165, with feed barley and peas at $150. If one must grow a cereal, which is a must given rotational considerations; wheat beats oats and feed barley. Peas are going to lose acres under this economic scenario and lentils may lose some given 2010 production problems and the fears it instilled in Canadian growers!

There is also the potential for spring wheat acreage to also increase by another 0.5 – 1 million acres, provided that prices remain firm. There is some who feel there will be more significant acreage increase in the mid to low quality non-CWRS varieties and go the route of local ethanol and feed plants. As has been well documented the Canadian spring wheat crop in 2010 was ravaged by wet weather. The result of this is only 10% of their total crop going into their number 1 grade (CWRS1) a further 28% into CWRS2, 38% CWRS3 and 24% as CWRS4, this is in stark contrast to the previous 4 years when CWRS1 was averaging 45%.

Although January is still very early to accurately forecast potential switch in acreage, the US futures market will be more of an indication over the next couple of months. What is certain that traders in Winnipeg all agreed that there would be tremendous pressure from soybeans and corn on eastern US spring wheat territory. In the further west regions of the US corn and soy are not significant options. Whilst out in the western Canada it is anticipated that there will be some slight competition from canola and pulses in the north, but the traditional wheat and durum areas in the west will likely remain.