While the grain industry, U.S. politicians and regulators in recent months have been studying grain price movements over the past year with a view to curbing volatility and cash/futures price convergence problems arising from "outside" players, the markets themselves have moved on, focusing primarily on fundamentals. The issues that attracted the outside players to commodity investments — portfolio diversity and financial sector uncertainty — persist to some degree, and the subsequent negative effects on the grain industry’s hedging operations continue to draw scrutiny and a quest for solutions.
But for the time being, grain prices have taken most of their direction from supply/demand prospects, and for maize (corn), the outlook in the past few months has tended to be bearish. Despite concerns in North America over wet, cool planting weather that was thought to discourage sowings — concerns that in June had pushed up prices by more than 30% from December lows — farmers in the U.S. ended up planting the second largest maize area on record, according to the U.S. Department of Agriculture.
Ideal weather through the U.S. crop’s critical pollination stage only added to yields and production prospects, driving prices down 20% from the June highs. Even though the USDA in August made a marginal reduction in its planted area estimate, the near-perfect season led the agency to project the 2009-10 U.S. maize crop at 324.1 million tonnes, a harvest that would be only 2% smaller than the record production of 331.2 million in 2007-08.
The big U.S. crop and a 44-million-tonne carry-in estimate are expected to result in total 2009-10 U.S. maize supplies of 368 million tonnes, a record high that would surpass the previous record of 364.8 million set in 2007-08. This level of supply and the expected pressure on prices should spur U.S. domestic consumption, which the USDA projected at a record 273.7 million tonnes.
According to the USDA’s August report, 2009-10 U.S. feed and residual use is forecast at 134.6 million tonnes, up less than 1% from the previous season, and most of that increase is based on allowances for residual disappearance. Record-high maize prices a year ago prompted sharp reductions in livestock production, which will keep a lid on domestic feed demand for maize and other coarse grains. U.S. food, seed and industrial use (FSI), on the other hand, is forecast to reach a record 139.1 million tonnes in 2009-10. If realized, food, seed and industrial use would exceed feed use in the United States for the first time.
Of the FSI total, the USDA projects 106.7 million tonnes for ethanol use, an increase of 15% from the 92.7 million tonnes used for ethanol in 2008-09. If realized, maize for ethanol in 2009-10 would account for 39% of total U.S. maize disappearance, up from 8.9% of total disappearance as recently as 2001-02.
The jump is based on projected maize prices, which should provide favorable ethanol producer margins, in contrast to the poor margins prevailing in 2008 when maize prices soared. In addition, U.S. mandates for ethanol blending are set to increase to 45.6 billion liters in 2010 from 39.9 billion liters in 2009.
U.S. maize exports in 2009-10 are projected at 53.3 million tonnes, up 13% from the 47-million 2008-09 estimate, based on an expected decline of 10 million tonnes in non-U.S. production. Global exports are projected to increase by about 5 million tonnes from 2008-09, to 84.3 million, the third highest on record. Both U.S. and global ending stocks in 2009-10 are projected to decline slightly from the previous season. U.S. stocks at the end of 2009-10 are forecast to stand at 15% of use, while global stocks should stand at 18.6%, but both above recent lows set in 2006-07.
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