USDA reduced its corn carry over projection to 675 million bushels in its latest supply and demand report confirming the tight stocks situation in corn that we believed existed.
The corn market doesn’t have China in it yet and we would not be surprised to see China in our corn market yet this year. The price of pork, the price of ethanol, the decline in the dollar relative to exports has kept up enough with corn costs that no general liquidation of operations reducing the rate of corn consumption by end users has occurred from prices to date. Prices have to rise to levels that accomplish that.
What does it take to cut 250 million bushels from usage? Livestock producers have to lose money before they cut production. The cattle industry has been liquidating cows and can cut numbers on feed leaving feeder cattle in pastures if the cost of feed produces losses.
The decision-making center of the poultry industry is concentrated with so few integrators, that they manage supply like synchronized swimmers. They have slowed expansion, but have not cut production. That can change very quickly. The hog industry is the most inflexible managing production, tied structurally into production by contracts so that they only quit when equity is drained and the banker forecloses.
Premiums in deferred LH futures allow hog producers to buy corn yet at current prices and still clear profits. Production margins have to get a lot worse and stay that way to force significant liquidation of livestock.
Most producers have corn needs covered into the second quarter of 2011. Fewer end users have physical needs covered to new crop. The USDA carryover projection will likely produce some regional shortages and like a game of musical chairs somebody would get left out.
The world has gotten used to just-in-time inventory management for food and feed around the world. Globalization provided great flexibility moving stocks around to where they were needed. That complacency is giving way to recognition that food stability is provided by reserve stocks and many nations don’t have them.
China used its pot of cash to lead the way acquiring food reserves but other countries from France to Russia to the Mid-East are making policy changing decisions to boost reserves that will tighten global stocks further raising prices.
The countries complaining about speculators and food inflation are contributing to it themselves with their own policy. Nothing is more stupid in the whole world than Europe’s GMO restrictions, which are the most damaging thing contributing to food production limitations that exists today.
USDA is underestimating exports. China is not going to leave us with a 140-million bushel soybean carryover. They will buy soybeans until the price goes so high they stop and that price has not been found yet.
The grain and soy stocks that exist are what will supply end users until new crop. The markets are screaming at producers to grow more – find more acres, even marginal ones and pour the coals to inputs for maximum yields.
No one has had an answer to where we find 10 to 12 million more acres this year to provide any cushion from acres to production potential. I believe that this is the most potentially explosive market condition that I have experienced in the business. Yield will be critical and the SOI-La Nina-Farmer Benner drought cycle are building up a wall of worry over this growing season for the Corn Belt. Trend line yields are a must.
A late spring delaying planting followed by a hot summer would be about the worst thing that would happen. I don’t predict the weather. It doesn’t take much of a market analyst to foresee the market response to a serious weather threat to this crop. I would describe the result in one word, “panic.” We are one major weather event away from a global food panic.
Predicting a price levels if end users panic is a fool’s endeavor. Panic is not rational, but emotional and with the level of open interest in commodity markets, emotion would unleash prices thought to be irrational. China would draw on the reserves that it has acquired while the rest of world importers fight over the scraps left.
There would be a consumer backlash against farmers and agriculture and a destruction of the demand base forced by price rationing.
Our $6.18 December corn and $13.75 November soybean upside targets were initially met with skepticism. Both have been reached as chart gaps were filled, deserving some sales.
Outlook is outlook and business is business and $6.18 and $13.75 is good business. It is early for a weather market yet and current prices levels have been achieved from the need to ration old crop supply and encourage maximum production.
Nothing has been resolved yet. The job of the market is to ration tight old crop stocks and provide the economic incentive to farmers to pull out all the stops expanding summer crop production.
USDA carryover projections are still too large and are destined to be trimmed further in subsequent supply/demand reports. There is no evidence from end-users that anybody is curtailing use of anything, even cotton. Farmers will deliver all the $6 corn and $14 soybeans that Mother Nature will let them. A weather market would add another entire dimension above what markets have accomplished to date.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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