Monday, July 23, 2012

Grain Market Heats Up

The old saying always seems to ring true, “big crops get bigger, whilst small crops continue to bleed yield potential”. This is exactly what continues to transpire in the US Midwest, which is now in the worst drought in a generation.  US crop conditions continue to cop a pasting, and with more heat set to return to the Midwest this week, yields potential will get a whole lot uglier. Although Eastern Australia production potential has stabilised (for now), WA prospects are slipping fast with much of the state  running at a 45mm deficient (and that is only in July!). This is one to watch and just may be the fuel  to this already white-hot market.

All agri commodities continued their spectacular gains with corn and beans hitting all-time highs, but….. if you take into account inflation, markets are still well of highs of the 70’s and early 80’s. Last week, wheat rallied 96¢ (+197¢ in July), corn +84¢ (+198¢ in July), beans +144¢ (+296¢ in July) and canola +$21 (+$58 so far in July). A high-pressure system is forecast to linger all this week, bringing more blistering temperatures to the Midwest, which will see weekly crop conditions take a further nose dive tomorrow.

The US EPA also stoked the bullish fires, stating it had no plans to cut the ethanol mandate due to this year's drought stricken crop. Prices will need to rise high enough to slow other sources of demand. However it isn't as simple as cutting off corn used for ethanol, what about the by-product (DDGs) which now makes up a large percentage of consumers feed requirements.
And so with US ethanol plants margins evaporating, DDGs is getting scarce. Usually a cheaper source of protein, more demand may soon emerge for soybean meal to meet the slack?

And although on paper soybeans have been the most bullish in regard to tight stocks. In terms of agronomic conditions beans still have a long way to decline further in the US Midwest, with forecast yields ranging anywhere between 40 - 35bpa. Blistering temps are forecast this week, right when water is needed most when the plant is setting pods. Whilst the long range forecast calls for above normal temps and below normal rainfall, which will cause further deterioration in yields.

Similar to what happened late last year; only an anticipated huge planting increase in South America and a corresponding large yield it seems can only slow the soybean rally. Analysts expect the 2012/13 Brazilian bean crop to produce 82mmt (+25% from 11/12). However these beans won’t be harvest for another eight markets, and so between now and then the US would be the only market for hungry Chinese mouths. While it seems Argentinian farmers have had enough of planting wheat/barley and are seen rising bean area by 1mha to 20mha. Production may surge 33% from this year’s drought ravaged crop to 55mt. Paraguay’sis also expecting plantings to rise 10% (from the previous record) to more than 3mha.

But it is not only in the US where crops are feeling the wrath of Mother Nature; serious concerns have been lingering in Black Sea region for months now.  Wheat production in Ukraine -41% to 12.9mmt, Russia's -17% to 45.8mmt (only 3.5mmt more than the drought year of 10/11) and Kazakhstan's -48% to 11.9mmt.Exports are also forecast to slump alarmingly, with Ukraine only expected to ship 3.6mmt of wheat this season, Russia 11mmt and Kazakh's 5.6mmt. While in southeastern Europe drought like conditions continue to be a concern cutting already reduced yields.

With international FOB prices rallying $70 this month, reports of defaults and washouts have started to emerge. Egypt reportedly defaulted on a few corn and wheat shipments from the Black Sea, whilst Chinese importers are said to be looking at selling back US corn and booking the profits. But with most major consumers buying hand to mouth at the moment, it will take a production cut from left field (WA..?) to raise the possibility of panic buying to potentially lift this market further. 

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