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Market trades supply, demand

08/25/2011 @ 3:27pm

Which comes first? The chicken or the egg? Or, for grain markets, supply or demand? 

Right now, the market seems to be dealing with both sides of the equation.  Dry areas of the Corn Belt mean the general consensus on supply of corn and soybeans is that the crop is shrinking. 

With the smaller perceived supplies, there is also the concept of smaller demand.  Export sales have been lackluster.  Chicken producers are obviously cutting back.  Cattle and hog producers have been substituting feed wheat, but are not necessarily cutting back total feed use.  It will take the September 1st stocks report (not issued until September 30th) to answer the questions regarding corn feeding in this quarter.  For the year, pork and beef production are both around one percent higher for the year. 

Corn for ethanol use is also strong (weekly ethanol production numbers translate into approximately what the USDA has in the supply/demand tables).  An ethanol plant can also go out 3 to 6 months and lock in profitable production margins.  An ethanol plant that makes money is not an ethanol plant that is going to cut back!     

There are definitely competing crops in the world and, for corn, the competitors are wheat crops from Australia, Russia and other countries of the former Soviet Union.

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The risk of loss in trading commodities can be substantial.  You should therefore carefully consider whether such trading is suitable for you in light of your financial situation.    


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