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Grain demand is bankrupt, CBOT traders say

Agriculture.com Staff 12/04/2008 @ 5:39am

CHICAGO, Illinois (Agriculture Online)--The exceptionally high grain prices this year along with high fuel prices created a positive demand picture for U.S. corn, soybeans, and wheat. Now that demand is in jeopardy and threatening to keep CBOT prices lower, floor traders say.

Specifically, U.S. soybean crush demand is dropping, feed-use is expected to drop, and corn-for-ethanol use has been sinking.

"We bankrupt demand," one CBOT floor trader, choosing to remain anonymous, says. "We've got less demand now than we had a year ago. We may have to roll back USDA demand numbers for corn and soybeans 2 to 3 years to get a valid domestic use number."

LOWER BIOFUEL PRODUCTION

Traders say the drop in the demand for corn, soybeans, and wheat is tied largely to the economic crisis.

As the prospects were built higher and higher for ethanol and biodiesel, the markets built in price support based on both government mandate levels and discretionary usage. However, things change, and this year's global economic crisis has eliminated the economics for discretionary usage of biofuels.

"For instance, the margin in ethanol blending, considered a discretionary use of corn, is now negative," one CBOT floor trader says.

For biodiesel producers, stock products such as animal fat, vegetable oil, and others are cheaper to use than soybean oil.

CHINA PROVIDES HOPE

The only reason U.S. soybean exports are staying alive is because China's government has decided to procure its soybean stocks. In the next 90 days, China is expected to buy 1.5 million metric tons of soybeans, many of those from the U.S.

"As China's government stockpiles soybeans, their beans remain cheaper than the domestic price, and this attracts the Chinese soybean crusher toward imported soybeans. How long China will subsidize U.S. soybean purchases is unknown," the CBOT floor trader says.

Meanwhile, the problem on the U.S. soybean demand balance sheet is with lower crush levels. "The U.S. has already been lowering crush. Even if we take another 20 million bushels off the crush numbers, the industry still could be running at a higher capacity than what the market can take," the CBOT floor trader says.

CORN EXPORTS DROP

With China keeping U.S. soybean exports alive, exports for wheat and corn are being trimmed.

On Monday, the USDA estimated that U.S. corn exports will decline about 535 million bushels this crop year vs. last. However, export sales are already well over 600 million bushels behind last year's pace just 3 months into the crop year!

Vic Lespinasse, GrainAnalyst.com, says the export numbers could drop further.

"The government's lower estimate suggests that a further decline in actual export demand is likely in coming USDA projections," Lespinasse says.

Within the last month, the demand-side of agriculture has lost some big users. For instance, as many ethanol plants close, VeraSun Energy, the second largest U.S. ethanol producer, announced it has filed for Chapter 11 bankruptcy. Bunge, a large global end-user announced the closing of a soybean processing plant in Ohio. Also, Pilgrim's Pride, a giant in the U.S. poultry industry, announced bankruptcy plans.

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