Ray Grabanski: Bull alive and well
The bull market in grains is alive and well, thank you, as corn once again rallied to new highs today on yet another cut in ending stocks in the monthly USDA report. In February, we got another cut of 70 mb, but now that small number of 70 mb represents about 10% of the total ending stocks, as we were at 745 mb last month, and now we are at 675 mb. Wheat is now projected to have nearly 25% LARGER stocks than corn at the end of the marketing year!
That further intensifies the battle to limit the demand with higher prices, as corn still has very strong ethanol usage to date (in fact, it probably implies another 150 mb increase based on the speed of use to date). USDA hiked the ethanol use by 50 mb, but that might not be enough unless prices rise high enough to shut down some ethanol plants in 2011. How high prices will have to go to achieve that objective is yet to be seen!
Wheat and soybean ending stocks didn't change at all in the US, with only cursory cuts in the world numbers in the February report. Still, stocks of soybeans are already quite tight, and some project exports to be larger than current projections. In spite of that, the USDA left soybean exports and ending stocks unchanged in this report. While there was a lot of talk of cuts in Argentine production due to the adverse weather they suffered in January, an abatement of the dryness in early February/late January left them with only a 1 mmt cut in projected production this month. Offsetting that completely was a 1 mmt HIKE in the Brazil projection, so net from South America we have an unchanged production forecast from last month. That is quite a change from the chatter we were hearing in early January, when the drought was raging in Argentina. Now projections are likely to include further reductions in Argentina, but likely also further hikes in production in Brazil due to their ideal weather to date. Net, we may not see any change in projections for SAM production.
Wheat is a little more quiet market right now, with wheat in dormancy in most production areas, and the expectations of the wheat market are that prices need to continue to go higher anyway (the trend remains up). New crop wheat prices are struggling to maintain pace with the rising corn and soybean markets, so wheat prices are also seeing very high profitability ratios as well as corn and soybeans.
I saw some projections for profitability for southeastern ND and western MN for corn, soybeans, and wheat that include basically a 35-45% profitability margin projection for all 3 grains for 2011. These looked like realistic numbers, too, so the market already is giving producers a great deal of incentive to increase production in 2011. It likely will happen, but for now the market is still trying to attract acreage to ensure that, yes indeed, it will happen, in 2011.
But then that is what a market is supposed to do, to move higher to allocate out a short crop and to ensure that the short crop doesn't happen again in the following year (or years). It appears our market it taking that job seriously, and that is a very good thing for producers of our commodities. It will be a great year in 2011 (and perhaps beyond) - that is, if you price something in the coming months. However, typically that is a very big "IF"!