What a difference a few months
can make. From euphoric highs
earlier this summer, we’ve watched grain prices slide right back to where
they were about a year ago.
Before we get too distraught however, we need to remember that by
historical standards producers are still getting solid value for their
crops. Two years ago, farmers
would have welcomed the prospect of corn near $4.00/bu and beans close to
$10.00/bu, but after having tasted $6.00 corn and $15.00 beans, the
current prices are understandably difficult to swallow. Every day now, we’re fielding
calls in the office from concerned customers that want to know if the
markets will fall lower still or if we’re simply experiencing seasonal
weakness that will be followed by a rally into the New Year. Lately, I find myself scratching
my head when asked this question and the best answer I can give is: “I
really don’t know…”
What
I do know is that the slide in grain prices has mirrored the declines in
energy markets. The idea that
grains are recession-proof appears to be losing validity because grains
are no longer simply a source of food, but are also a source of
energy. As credit tightens
and economies slow, energy markets (including biofuels) are faced with the prospect of slowing
demand. At the same time, the
tight credit markets have forcing speculators (whose investments had
pushed the markets to levels that were arguably unsustainable) to unwind
their positions. The good
news is that grain prices have somewhat stabilized in the last couple of
weeks. Although grain futures
are trending slightly lower, the weaker Canadian dollar is supporting
local cash prices.
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The stronger US dollar
and weaker credit conditions in emerging economies are negatively
impacting corn exports in the US. In its latest Supply and
Demand Report, the USDA provided evidence of this by lowering its
export figure by 50 million bushels to a level that is now 22%
below last year’s total.
As corn exports slow,
concerns are growing about the health of the US
ethanol industry.
With the fall in energy prices, profit margins are thin
leaving little room for error. VeraSun Energy Corporation – the largest
ethanol producer in the US with an annual
production capacity of more than 1.6 billion gallons – fell victim
to bad bets on the corn market and filed for bankruptcy on October
31st. Despite the
gloomy news, it is important to remember that ethanol’s usage is
mandated in the US and the corn lobby
groups are powerful so we aren’t likely to witness a complete
collapse of the industry in the near future. (Even VeraSun’s plants continue to operate under
bankruptcy protection.)
Instead, we will probably experience a slowdown in the
growth of the industry.
The
US is wrapping
up the harvest of the second largest corn crop in history, this
despite all of the concern about the effects of flooding on the
size of the US corn crop back in
the spring. A
sizeable yield estimate of 153.8bu/ac is a reflection on the
continuously improving genetics available to producers. Could the phenomenon of
ever-increasing yields prove to be detrimental to prices in the
long run if supplies begin to out-pace
demand?
Looking to next year,
analysts estimate that the US
will need to plant an additional one million acres of corn to
satisfy demand.
Although weakness is finally beginning to show in the
fertilizer market, corn futures will need to work diligently
through the winter months to attract those additional acres,
especially if energy markets can stage a rally.
Here in Ontario,
local corn basis has strengthened as a result of very light farmer
selling and the lower Canadian dollar. Even though yields are
huge, storage is not a problem yet and buyers are outnumbering
sellers 4:1. It is
reasonable to assume that the lowest basis levels that we will see
this fall are now behind us.
Once harvest is complete, basis levels should continue to
increase, however producers should be cautioned that if they do
not sell, processors will be forced to turn to imports for
coverage. Local
producers could end up getting left out in the cold if enough corn
is imported in the short term such that it must be exported again
later in the year. |
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Like the corn market,
soybeans have experienced similar declines associated with
concerns of a slowing global economy, tightening credit conditions
and the corresponding sell-offs in energy and equity markets. As with corn, soybean
prices appear to have slowed their descent in the past two or
three weeks and have found some (relative)
stability.
The South American
growing season is now underway and there are emerging issues that
raise questions about upcoming soybean supplies. In Brazil, a lack of
available credit from government sources and from input suppliers
has forced producers to trim costs by cutting back on acreage and
inputs. In
Paraguay meanwhile,
expatriate Brazilian farmers are struggling with the government
over licenses to harvest their crops. Given the uncertainties
surrounding the licenses, these expatriate farmers are reluctant
to put their crops in the ground.
At home in Ontario,
soybean basis levels are strengthening rapidly. The weakness in the
Canadian dollar is translating directly into higher bids for
producers. With
harvest virtually over, the pressure to move beans has subsided
and sellers are getting hard to find. It appears that exports
from Ontario were significant again
this year and the crushers will likely need to import beans at
some point. The
timing of any imports will depend on when producers decide to sell
their inventories.
Should futures move higher into the early part of next
year, farmer selling will probably be strong and the crushers
should have adequate supplies for several months.
If however, futures do not rally, the crushers may need to
import beans earlier as many producers would hang on before
throwing in the towel and selling their beans in the summer. Barring a rally in the
Canadian dollar, I get the impression that there is still more
upside to basis levels in the short term.
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