Course grains

by Meyer Sosland
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For maize processors wondering what the 2008-09 crop year may hold for raw materials costs, market analysts offer a good news/ bad news outlook. The good news: based on existing fundamentals, maize prices are not projected to move much higher. The bad news: prices are not expected to decline much, either.

In a recent outlook report for the new crop marketing year beginning Sept. 1, the U.S. Department of Agriculture (USDA) projected the season-average U.S. maize farm price at $5 to $6 a bushel ($197 to $236 a tonne). New crop prices were just under the high side as of mid-May, after crashing from a record $245 to $260 earlier in the month.

Prices may stay under the record, but USDA’s projected 2008-09 range still represents a historic high for a season average. And even the $197 low end of the projected range would be about 14% to 22% higher than this season’s estimated average range of $161 to $173.

Apart from outside factors such as a weak U.S. dollar, investment interest in commodities and overall inflationary concerns, maize supply/demand fundamentals in the 2008-09 season are expected to provide underlying strength to the market. The USDA does not expect to see significant relief from the tight worldwide supplies and expanding demand that pushed up prices in the past year.

The USDA forecasts 2008-09 global maize production at 778 million tonnes, just below the 2007-08 record of 779.8 million. Most growers around the world are expected to plant less maize than a year ago and opt for soybeans, wheat and other crops, whose prices are competitive and whose profit margins may be fatter.

Despite lower area, output in several key producing countries, including China, Brazil, the European Union (E.U.), the former Soviet Union (FSU) and Argentina, is expected to increase from 2007-08. These projections are based on a return to more "normal" weather, higher yields and less abandonment.

The story is different in the U.S., where production declines should more than offset the aggregate increase in the rest of the world. U.S. planted area is forecast down by 8%, plantings have been seriously delayed by excessive rain, and yields are forecast to slip from trendline averages, leaving U.S. production down by at least 24 million tonnes, to about 308 million.

Tight stocks and record-high prices are expected to slow, but not reverse, global maize consumption growth in 2008-09. World maize use is projected to set a record at 788 million tonnes, but that represents only a 1.6% annual rate of increase, lower than in recent years.

Total U.S. maize consumption is projected to increase by 1.4%, to 270.8 million tonnes, in line with the global trend, but U.S. feed use is forecast to plunge by a dramatic 16% to 134.6 million. In fact, for the first time in U.S. history, food, seed and industrial uses (FSI) — projected up 25 million tonnes at 136.15 million — will exceed feed use of maize.

The FSI category is dominated by ethanol, for which 101.6 million tonnes of maize will be used in 2008-09, up 33% from 2007-08 and up 88.9% from 2006-07. The huge jumps reflect capacity expansions in the wake of previous and upcoming U.S. government ethanol mandates.

Based on the supply/demand outlook, no rebuilding of stocks appears on the horizon. World carryover is forecast to drop by 10.6 million tonnes to 99 million, the lowest since 89 million in 1983-84, while the stocks-to-use ratio, at 12.6%, would be the lowest since 11.8% in 1973-74. In the U.S., 2008-09 ending stocks will plunge to 19.4 million tonnes from 35.1 million, representing a 7.2% stocks-to-use ratio (the lowest U.S. ratio on record is 6.7% in 1995-96).

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