DAVID KRUSE
The corn market tracks the dollar. I have known that for some time, but I have never understood why, since the U.S. doesn’t actually export that much of its corn production, only 13 percent.
The USDA already lowered its year-to-year corn export total from 1.835 to 1.6 billion bushels. While many have expressed a bearish opinion of U.S. exports, I believe that the USDA has the reduction fully accounted for and would argue for an upward revision.
If not, a further reduction in exports would be tiny relative to production and usage. When USDA estimated both feed and ethanol usage they did so at higher prices than are currently being traded.
Lower prices will grow demand. End-users did a great job of rationing tight corn stocks without sustaining permanent demand destruction. If we would have had $9 to $10 corn, we would have paid for it later with a long period of sustained lower prices.
Nobody got put out of business that was using corn by the high prices. That is a good thing. In fact, we believe an upward revision in both 2012 feed and ethanol corn consumption are likely from current levels.
The 27-member nation European Union will buy less than 1 percent of U.S. corn because of GMO protectionism. Almost none of the U.S. corn crop traded requires any foreign currency exchange, yet the corn market follows the dollar like it all did. We have friends in Dresden, Germany who tell us that they have pulled their savings from the banks and bought a condo, obviously fearing for the safety of their money and the erosion of its purchasing power.
Europe didn’t have a sub-prime mortgage blow-up so I assume that real estate values are more deflated. They said that the repeated failure of the EU leaders to back the Euro had caused them to lose confidence. They believed that Germany should back the rest to end the crisis, but Merkel hasn’t done that. Europe gave us two world wars so why should we believe that this Union can work?
The impact of the Euro on U.S. corn prices is very much an indirect influence.
I think that U.S. domestic grain consumption has grown so much relative to exports that it should de-link the dollar from the corn market. We admittedly have not seen it do so yet. If the value of the dollar does soar in 2012 it would take tremendously bullish stocks tightening to support corn prices.
The bulk of world-ending stocks of corn are in China and won’t be exported so will be valued in Yuan.
China produced a large corn crop, but consumption there is growing so fast that stocks had been depleted and needed the recharge. They will still import some US corn.
The link between the dollar and the soybean market is a somewhat different story – 42.7 percent of 2012 U.S. soybean production will be exported. If you added the soymeal and soy oil products that are exported, over half the crop is sent to foreign markets. Strength in the dollar made U.S. soybeans more expensive than soy from South America and China bought soybeans from Brazil until they were all gone.
China will import more soybeans this year than last, all the talk about a slowing economy in China aside. It is just a matter of when and from whom they purchase them. $11 U.S. soybeans will work in China so we will see their attention turn back here.
A strong dollar represents more risk to the soybean market than it does to corn in terms of overall exposure. Only 6 percent of U.S. soybeans are directly traded with EU nations. There are Euro bears talking trading the Euro par with the dollar next year. That would not be good for U.S. soybean prices.
There is La Nina dry weather building in southern Brazil and Argentina and private crop forecasters have already adjusted South American production lower. The La Nina is at odds with the currency right now.
The currency wars are an ugly contest and it is frankly about as ugly as Europe can get before they just drown the baby and start over.
The U.S. public has itself worked up into so much of a frenzied negative opinion of the country’s economic prospects that it will now be hard to exceed. The weight of consensus opinion is that 2012 will be a horrible year for the global economy and funds have essentially bailed out of commodities to get the heck out of the way.
There is a 40-week cycle low due in corn and two-year cycle low due in soybeans that makes me suspect that funds will be sold out in 2011 setting these price lows. I have not seen the trade look forward to a new year with more foreboding and cautious stance than is seen this December.
That triggers the contrary opinion from me. When have they ever forecast an economic calamity this extreme and been right? I suppose there is always a first time. If 2012 is just a half-way normal year economically, commodity markets would rally in relief.
Price declines have been so extensive that room for retracement rallies exist. Current prices work for CBOT end-users. They even allowed inflation to mitigate in China.
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.