Coarse grains

by Meyer Sosland
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After crashing by more than 50% from their record highs in mid-2008, cash maize (corn) prices in early 2009 had rebounded by some 20% off the lows set in December. But as turmoil continues in the financial arena and indicators point to a serious global recession, volatility has persisted, leaving coarse grains markets plagued with uncertainty.

It’s not only outside factors that are causing angst in the coarse grains market. Although crude oil prices, currency relationships, investment patterns and credit crises continue to exert strong influences, supply/demand fundamentals themselves have contributed to the price roller coaster.

On the bullish side, serious drought associated with a strengthening La Nina event in the Pacific Ocean has developed in South America. Concern about the South American crop contributed to maize prices advancing off their December lows and has tempered heavy selling pressure.

In its January report, the U.S. Department of Agriculture (USDA) slashed Brazil’s projected output to 51.5 million tonnes versus nearly 59 million in 2007-08. Similarly, Argentina’s 2008-09 maize production forecast dropped to 16.5 million tonnes from about 21 million a year earlier.

But the USDA also noted a huge jump in expected Chinese production, with that country’s 2008-09 maize crop estimated at a record 165.5 million tonnes. The 9% increase from 2007-08 was based on expected dramatic improvement in yields, the USDA said.

In the United States, 2008-09 maize output was estimated at 307 million tonnes. Although that output is down 7% from the record 2007-08 harvest, it still is the second largest crop in U.S. history.

So despite the South American weather woes, 2008-09 world maize production, at 791 million tonnes, should be nearly unchanged from the record 791.5 million harvested the previous season. Given the large supply, demand prospects take on particular relevance, and amid the world’s economic woes, analysts regularly have tossed around the term "demand destruction" in reference to everything from crude oil to credit.

The USDA projects a cut in 2008-09 world coarse grain imports and consumption as the sluggish economy limits demand. While the agency put world coarse grain use down 7.4 million tonnes to 1.08 billion, it projects total maize consumption in 2008-09 to rise by about 1% to 783.2 million tonnes.

Global consumption of maize for feed in 2008-09 is forecast to slip by about 2% to 485.5 million tonnes, as weak economic conditions will curb incomes and meat demand. In the U.S., 2008-09 feed use of maize is projected to drop by 11% to 134.6 million tonnes, the lowest since 1996-97, as high feed costs last year forced cuts in animal numbers.

The dramatic drop in crude oil prices has forced a decline in the price of maize-based ethanol, and the USDA noted that sustained negative U.S. production margins had reduced incentives for output. Consequently, projected U.S. maize use for ethanol was cut to 91.4 million tonnes from an earlier 2008-09 estimate of 94 million.

As Northern Hemisphere producers look ahead to planting season in a few months, they face many difficulties, and their decisions will carry well into the 2009-10 season.

Production costs remain elevated, with fertilizer and other input costs up to three times higher than last year. Meanwhile, grain and oilseed prices are much lower.

Throughout the U.S., indications are many producers may opt to plant soybeans, which have lower input costs than maize. In recent years, maize and soybean prices have "battled for acreage," but given reduced demand expectations, that battle may not develop this year.

Concerns also are surfacing that many bankers may balk at making farm loans because of the financial and credit crises. However, some analysts say that issue may not pose a problem because producers can use USDA loan and loan guarantee programs.