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Grain Demand vs. Supply vs. Economic Outlook
As grain prices have crept higher this summer, specifically corn, the growing question is whether demand can either sustain or build.
All eyes are on ethanol and profit margins, as well as the export markets, to see if other nations will continue to buy our product. For the short term, despite lower yields, it seems as though ethanol plants and countries that need to import grains are remaining hand-to-mouth, not panicking about the lower yield potential, but only buying as deemed necessary. And why not? It makes good business sense. Why aggressively buy now when there is a potential large crop to be planted soon in the southern hemisphere?
Now, there is absolutely a bullish argument to be made. The corn bulls argue that we have a supply issue. As a result of dry weather, the U.S. crop is expected to come in a bit lower than what was previously expected. Meanwhile, a corn boom is forecasted in South America, namely in Argentina and Brazil. And do not discount either country.
The Buenos Aires Grains Exchange forecasts 2010-2011 corn output at 21 million tons while the USDA foresees a crop of 22 million tons. Argentina is the second largest corn exporter behind the U.S., which only exports about 15% of its crop to foreign buyers. The Argentine 2011-2012 corn harvest could hit a record 30 million tons. And rumor is that the country is ready to get in the game and export more than they ever have before. Now, if you have the patience to wait until mid-winter here in the U.S., there are some industry experts who say La Nina could once again hit crops this season, but its effect would be moderate. "If good weather permits it, we'll have a corn crop of between 26 and 27 million hectares," said Juan Gear, vice president of Maizar, an Argentine industry group.
Brazilian farmers also appear to be excited about the high price of corn. There, the number of corn acres expected to be planted this season is estimated to increase by 4% to 5%.
So, if the growing season goes well, the increase in supply will ease the low ending stocks burden, which could result in corn dropping to $6.00. However, if the Southern Hemisphere has a disastrous growing season, the market could rally easily to $9.00.
If only it were so simple to just point to the weather to figure prices. Add a jumpy global economy to the mix and you have a recipe for heartburn that even Rolaids can't fix. Any signs of further European Union stress, or U.S. economic stress, or a whisper of Chinese default could send the market crashing lower, no matter how low our U.S. yields may be.
In the end, the question is, "Who will win: the economy or demand?" The answer is probably both or neither. Producers and buyers will make adjustments.
All of this is nothing new. It is typical for an economic cycle. What is scary, however, is the high level at which commodity prices are currently. The potential risk that exists for both the producer and consumer of grains is greater than ever. Profits could turn into losses virtually overnight. It's time to sharpen your risk management pencil, seriously preparing for whatever the future holds.
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