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Changing times, changing strategies

Analyst: World’s grain stocks shift from structured surplus to structured deficit

November 25, 2012
By LARRY KERSHNER, kersh@farm-news.com , Messenger News

AMES - The causes that lead to record-high grain prices was not news to farmers and agribusinessmen as they gathered for a meeting in Ames on Nov. 15.

But the potential for dwindling world grain stocks made some sit up and take notes.

An analysis of the world grain situation was presented by Sterling Liddell, of Rabo AgriFinance, sponsored by the Iowa Soybean Association, concluded that "There is a high probability there will be a drought somewhere in the world and it will affect your markets," Liddell said.

Article Photos

-Messenger photo by Larry Kershner
Iowa grain growers and representatives of agribusinesses listen to Sterling Liddell, of Rabo AgriFinances, during a Nov. 15 meeting in Ames on world market trends. Liddell said high prices and volatility will become the new norm in in world grain markets.

As a result, Liddell sees a "new normal" developing for grain marketing, including:

Higher and more volatile prices.

Stronger market responses to global policy changes.

Increased sensitivity to global weather patterns. "There will be little room for error," he said.

A stronger linkage between markets.

Liddell's presentation outlined how growing economies and wealth in developing countries, especially in China, has increased demand on meat production, which is causing the world's grain processors to cast an ever-widening net for feed grains to meet domestic needs.

China, he said, is the country marketers are watching now, with growth in securing soybeans from the U.S. and South America, and will soon be looking for corn and possibly pork.

"But China's population is old," Liddell said, "whereas in India, the population is young and growing.

"The saying is true that today it's China, tomorrow it's India."

And demand on feed grains is as crucial in Russia, he said.

"In 2010, Russia cut off exports whether they were sold or not," Liddell said. "Russia's goal is to be self-sufficient in poultry."

Russia's embargo put a strain on Egypt which secured wheat from Russia. Egypt bought wheat elsewhere at inflated prices, which caused unrest in that country.

"So not only is the market susceptible to trends," Liddell said, "but also to government policy."

He said the market price for corn and soybeans is seeing plantings in the U.S. stretching farther west, with wheat acres falling off, stressing that market.

According to Rabo AgriFinance, the supply of global wheat has shifted. From 2001 to 2011, the U.S. wheat supply is down 9 percent, South America and South Asia are down 2 percent, East Asia is down 1 percent, Oceana and the European Union are stagnant, while the Middle East is up 1 percent and the former Soviet Union states are up 12 percent.

Likewise, the carryover stocks for soybeans is tight enough, Liddell said, that Smithfield Foods is importing corn and soybeans from Brazil for its swine feeds.

"It's better to know you have it," Liddell said, "than to think you have it."

Although this was a soybean meeting, corn was still the center of focus for most of those in the room.

Liddell said the recent history of basis shows that there is still plenty of competition for corn despite the reports of rationing.

He said basis is at plus-50 and plus-60 cents for corn in Texas and Oklahoma. In Iowa, basis is lower, but still higher than usual.

Basis is the difference paid locally for cash corn, below the Chicago Board of Trade futures price. A local elevator will offer a price well under the CBOT since growers would have less transportation cost upon delivery.

In summer 2011, basis in Farm News' coverage area ranged from plus-18 to plus-25 cents over CBOT. Basis is now slightly under CBOT, but prior to 2010, basis was ranging routinely from minus-40 cents and more.

When basis are at or above CBOT futures, Liddell said, while cattle and hog industries are culling herds to avoid high feed costs, one has to ask, "is the corn really out there, or just not selling?"

He thinks that possibly the grain isn't sitting unsold in the bins. "Fifty to 60 percent of the new crop has been sold," Liddell said. "There's been a real battle to own this crop. We're not trending toward building stocks.

"So rationing isn't happening enough."

U.S. livestock industries have cut poultry production by 1 percent, hogs down by 2 percent and cattle is down by 12 to 15 percent, Liddell said.

To keep corn prices from spiraling out of control, minimum rationing on the demand has be at 11 percent, he said. However, Rabo AgriFinances is expecting only a 6 percent drop in demand, which will stress corn supply until South America harvests in March 2013 and the U.S. harvests next fall.

If weather whittles yields down in South America as happened in 2012 and if the U.S. has planting problems or other weather problems affecting yields in 2013, a real crisis in world supply can occur.

Since Nov. 15, Argentina announced it estimates it will have a below-trend corn yield and Iowa State University's Elwynn Taylor said he expects 20'13 to be the fourth consecutive year for below-trend yields in the U.S.

As of Nov. 15, Liddell was predicting a record corn harvest in Brazil and possibly a trendline yield in the U.S. which will see a softening of the corn price by this summer.

In either case, Liddell said, "What happens if China starts importing corn?"

The next big news from the U.S. Department of Agriculture will be the December year-ending stocks report and the January intended acres to be planted, Liddell said, which may give marketers a direction for futures trading.

 
 

 

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