According to conventional market wisdom, "the best cure for high prices is high prices," as producers will increase plantings to capture higher returns, thereby increasing supplies and subsequently pressuring prices lower.
That economic rule appears to be playing out for maize so far, as earlier sharp advances in prices have led to increased plantings in the Southern Hemisphere. As a result, maize prices have eased somewhat from the 10-year highs set in early December.
A recent report from the U.S. Department of Agriculture (USDA) forecast 2006-07 world maize production at 692.9 million tonnes, down from 2005-06 output of 695.2 million tonnes, but up 4.2 million from the USDA’s previous 2006-07 estimate.
The USDA raised its latest estimate based on higher production in Argentina and Brazil, where producers were sowing more maize in response to the higher prices and favorable weather. The latest USDA estimate puts Argentina’s 2006-07 maize production at 19 million tonnes versus 15.8 million in 2005-06, while Brazil’s 2006-07 harvest now is forecast at 42 million tonnes versus 41.7 million in 2005-06.
The production increase contributed to a slightly higher ending stocks forecast, to 92.7 million tonnes at the end of 2006-07. That figure is 26% lower than the 2005-06 ending stocks level, denoting serious supply tightening, but it was an increase from earlier forecasts.
The increases in the supply outlook provided psychological pressure on the market, helping to take maize futures some U.S.$8 per tonne off their highs. Even so, most market analysts expect the market to remain firm through the first half of 2007, when Northern Hemisphere plantings are completed and presumably will show an increase. At that point, upward price pressure should ease more significantly, the analysts say.
But many analysts also think the maize market could be poised for a sustained bull run over the next few years. These observers note current stocks tightness and say demand will continue to increase as the expanding ethanol industry takes a bigger bite out of supplies amid high oil prices.
As noted, world maize stocks are expected to shrink sharply in 2006-07, especially in relation to use. The U.S. is forecast to see its stocks-to-use ratio approach a 10-year low, a situation that has fueled the current rally.
But unlike conditions in 1995-96, the last time U.S. stocks were comparably tight, world stocks are also much lower. Ten years ago, the U.S. stocks-to-use ratio was 6.7%, while the ratio for the rest of the world stood at 32.8%; by the end of 2006-07, the U.S. ratio is forecast at 9.8%, but the ratio in the rest of the world will stand at only 14.4%.
On the demand side, maize for 2006-07 ethanol use in the U.S. currently is projected at 54.6 million tonnes, up 34% from 2005-06 and accounting for more than 22% of total use. But based on new plant construction scheduled to come on line in 2007, some observers think U.S. maize use for ethanol could surpass 81 million tonnes.
If realized, the situation would push up U.S. prices to ration feed use and attract even more planted area. But some analysts question how much more area actually can be brought into maize production, given unprecedented tightness in other commodity markets and the need for maize farmers to maintain crop rotations for agronomic reasons.
One analyst said high global prices can bring a strong supply response only if the rally is limited to one commodity at a time. Another analyst noted that several grain and oilseed markets were in deficit and carried strong prices, which would complicate the traditional market mechanisms of restoring surpluses. WG
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