April 19, 2011
Despite the dramatic events of the last few weeks around the world, the dominating fundamental factor in the coarse grains market remains the low level of U.S. maize (corn) stocks. Prices remain high as the market signals to farmers that it needs more grain.
There was a short-term selloff as fund investors responded to unrest in the Middle East and North Africa by shifting out of long maize positions and into energy. In its monthly report on the market, Rabobank pointed out that spot CBOT corn had shed almost 10% in the last week of February.
“Our bullish outlook for corn prices into Q2 is maintained,” it said. “The brief dip in futures prices during the second half of February was met with robust demand from commercials looking to extend coverage and lock in positive margins, particularly in the hog, cattle and ethanol industries.”
Added to the uncertainty caused by unrest in the Middle East was the earthquake/tsunami disaster in Japan, but again, although there may be long-term effects on feed compounders based in the affected areas, Japan’s capacity and appetite to import grain, particularly feed grain, has not shown any sign of being significantly reduced.
Rabobank also noted a crop downgrade in Mexico, which had resulted in an unexpected increase in U.S. maize exports.
“In our view, the market cannot afford to be sending a signal to consumers, trying to increase their demand beyond what is expected, since ending stocks are already projected to fall to wafer-thin levels this season,” the report said.
It named the U.S. poultry sector as the “most likely chink in the demand chain at present, with high feed costs and abundant supplies creating a significant cost-price squeeze for producers.
“However, we are not seeing any evidence of a contraction in production in the weekly USDA statistics. Producers seem unwilling to reduce production given the competitive environment and the need to maintain market share. They appear to be holding out for an uptick in product prices in the spring and summer.”
It also pointed out that the old crop/new crop CBOT spread had opened by 53% in February alone, “a clear reflection of the tightness in the nearby contracts.”
David Eudall, analyst at Britain’s HGCA, highlighted the discount from the July Chicago contract to the December contract, but made the point that December was still above $6 a bushel.
“The price for December is still, historically speaking, high and so could still attract acres to be planted,” he said. “Old-crop prices have been firming for a number of weeks as stocks in the U.S. are forecast to remain tight for the rest of the season and demand from both export business and from domestic U.S. ethanol production has been steady through the season,” he said.
Current forecasts have U.S. ending stocks at 18 million tonnes, or 15 to 18 days of demand, according to Eudall, “and will continue to need to act to ration demand through prices.”
In a recent Grain Market Report, the International Grains Council (IGC) predicted a rise in world maize area for 2011-12 to over 161 million hectares, 1% up and the highest level on record.
“In the U.S., very strong prices, growing domestic demand from the ethanol industry and the likelihood of exceptionally low stocks relative to use at the end of the season, are forecast to lead to a 4 percent increase in area (harvested basis) to 34.3 million hectares,” it said.