2009 grains year in review: Persistent issues linger
Even in the wake of worldwide economic crisis, weather was the single most important grains market determinant in 2009 throughout the globe.
The U.S. Midwest was dealt a triple blow. A wet spring delayed corn and bean planting. A cool summer then slowed development of these crops and finally, a wet, cold fall severely delayed harvesting. Despite all this, Midwestern farmers have achieved record or near record corn and bean crops.
Owing to a shorter growing season, beans are usually harvested before corn. Following the bean harvest, soft red winter wheat, the type traded at the Chicago Board of Trade, is often planted on the same acreage and harvested in the spring. Due to the severely delayed Midwestern bean harvest this fall, soft red winter wheat planting was considerably reduced as it was too late to plant the crop in many areas.
Indian agriculture is heavily dependent upon the annual monsoon rains. This year, the worst monsoon failure in almost 40 years greatly reduced Indian crop production. Fortunately, the impact of the drought was reduced by large stockpiles of grains including wheat.
Argentina was expected to harvest roughly 50 million tonnes of beans early in 2009 but a severe drought cut the crop to only about 32 million tonnes. Conditions were much less severe in Brazil, where early expectations for a bean harvest around 62-64 million tonnes were trimmed by about 10%. Currently, weather conditions in both Argentina and Brazil are very favorable and huge bean crops are expected in both countries. The current USDA estimate predicts an Argentine bean crop of 53 million tonnes and a Brazilian crop of 63 million, both of which would be records.
Trading issues in the commodity markets including grains attracted the attention of U.S. government officials this year. The US Congress heard testimony from the head of the Commodity Futures Trading Commission and key members of the Senate and House were contacted by lobbying groups who urged reform in Federal oversight. In an effort to increase transparency in the markets, the CFTC now issues a much more detailed weekly report on the positions of the high-profile trading groups including hedgers, commission houses, index funds which hold only long positions, and conventional funds which trade from both the long and short sides of the market.
Funds were again very significant players in all the grain markets. Index funds continue to take blame for distorting prices. The influence of the funds, index and conventional, is likely to increase over coming years as hedge funds and others extend their diversification into commodities, which are considered to be negatively correlated with equities. The diversification strategy is intended to enhance performance.
Index funds will launch their annual portfolio rebalancing in early 2010. Depending upon how much commodities moved over the previous year, funds adjust the percentage of their holdings. Current estimates project index funds will be buyers of tens of thousands of contracts in the grains, especially corn, which could have a strong bullish influence on prices.