Tim Hannagan: A demand pause seen
Now that the big crop report, by the USDA, is out of the way and 2010 crop production behind us, we can get our attention to what really drives the market and that’s demand.
The next crop report, in February, will not be as bullish, with production numbers now over. Reasons, South American crops are coming in and regardless of how large or small they are they capture the lion share of worlds export business.
We're also starting to see demand slow. Weekly export sales for corn had been lower, with key Asian business, that accounts for 70% of our exportable feed grains yearly, being lower for the third consecutive week. Bean sales have been under 500,000 metric tons, the last two weeks with Chinese purchases down 2 of the last three weeks.
We're not talking bearish demand. But, we see a seasonal slowdown into early March, setting up more of an unfriendly crop report perception in February and March. The last two years saw the seasonal slowdown lead to measurable price corrections in corn and beans, the last half of January into February. But, there could be a wildcard here keeping grain stronger right into the early spring. The underlying fundamentals are identical to 2008 when prices soared to historic highs late spring. We see ending stocks of corn at 745m.b. on the USDA report, down for the sixth consecutive month and representing a 40-day supply come this fall.
With continued dryness in Argentina into February, production shortfalls there could lead to 100 or 200 million bushels more exports here in the U.S., cutting ending stocks further. We sit now, one dry summer ahead here of running out of grain in 2012. Beans see ending stocks at 140m.b. and dropping monthly.
Most believe we will end up come fall under 100m.b,. hardly enough to mention. This sets up a mindset that corn and beans need to continue to seek out prices high enough to ensure we plant more acres of each. It will be very difficult for corn or beans to steal acres way from the other. Acres will come from fields once growing hay, alfalfa, oats and other industrial feeds. But, since the corn and bean farmers already plant fence-post to fence-post, any additional acres over the year prior will be limited to two million or less.
The last three years have proven we can't produce enough grain here to meet expanding and changing world eating habits. 2008 saw the battle for increase acres using a price rise continue from January 1 through July.
If funds decide to match the 2008 fundamentals and pricing to 2011, the prices have much further to go. But, be nimble on futures trading as the current tide of fund buying could turn the tide to fund profit-taking overnight.