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Grain markets reach stalemate

Grains prices seem to have reached a stalemate, with corn teetering between $6.30-$6.60 Dec corn and soybeans from $11.80-$12.50 in price.  

Wheat is basically "corn2", with wheat prices at a discount to corn in Chicago SRW, and essentially priced at a corn equivalent (or a slight discount to corn).  

The stalemate seems to be brought on by a realization that while US crops are poor in 2011 (corn yields are forecast at 8% below trend while soybeans are forecast at 5% below 'trend'), world production numbers rebounded from disappointing 2010 levels.  In particular, the Black Sea region including Russia and Ukraine had much better crops in 2011, making them a potential powerhouse in exports for the rest of the world to gobble up.  Pro Ag notes in particular the slowing of exports of wheat, corn, and soybeans from US sources.  We just aren't selling a lot of these products due to the competitiveness of the Black Sea region for now.  

So prices are at a stalemate.  Although many expect a reduction in the 

production numbers in the Nov. report, Informa yesterday put out a 149.5 bu/acre corn production number (higher than USDA) as well as a soybean production number slightly larger than the USDA number.  However, with disappointing US production numbers in northern territory, its likely the corn production number will be lowered somewhat (maybe to 145 bu/acre???).  Already we have a corn yield that is 8% below trend at 148.1 bu/acre from USDA, and a soybean yield number that is 5% below trend.  That is why prices are still relatively high for harvest time, and basis for corn is also unusually high for harvest.  

Pro Ag expects prices to hold relatively steady now that we've found a 'equilibrium' in this relative price area.  However, if world production numbers also continue to offset smaller US production numbers, perhaps prices will drift lower?  Pro Ag is concerned that farmer selling has been small which some believe is a bullish sign (which is causing a strong basis); however, don't markets usually go lower when farmers own all the stocks? This might be a year where prices drift lower throughout the year, but basis has to buy the grain from farmer's hands.  

Pro Ag also notes that corn prices are historically very high relative to 

soybean prices, with the soybean/corn price ratio now under 2.0 (and in fact under 1.9).  This is a historically low soybean/corn price ratio, and should attract much more acres of corn in the south American countries as well as the US in 2012.  It is very rare to see a soybean/corn price ratio as low as it is now, and becomes an issue for producers world wide as they make decisions for production in coming months.  Its likely this will attract more acres toward feedgrains and corn and away from oilseeds and wheat - exactly what the market is trying to accomplish.  This is brought on by the poor US corn crop relative to other grains, and is providing great incentive to the world's producers to shift production to growing more corn and less of everything else.  

With a ratio this strong, the market is likely to accomplish this and much more over the coming months.  Pro Ag would expect that corn has more downside risk, then, over the coming months than any other grain.  

However, the market is trying to accomplish an allocation of a small corn crop in 2011, and the price lever is the only mechanism left to do so until another crop is grown (South America?).  


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