January 30, 2009

 

Ongoing drought in Argentina is threatening to decimate the corn crop and has given the Chicago Board of Trade corn market underlying support, but opinion is split on whether it will end the dry spell for US exports.

 

The drought might have eased a little in recent days, as Argentina saw rain Sunday and a few scattered showers this week, with a chance for more rain late this weekend and early next week. But traders and analysts say damage has been done already, regardless of upcoming weather.

 

The country is expected to see a significant loss in corn production. The Buenos Aires Cereals Exchange last week projected total production would drop 33 percent to 40 percent.

 

But an abundance of feed-quality wheat worldwide and recently the Black Sea area has provided stiff competition for US corn and could continue to do so, some analysts said.

 

"I don't think (the drought) is going to lead to an increase in exports because we're battling the feed wheat side of it," said Chad Henderson, analyst with Prime Ag Consultants.

 

Joe Victor, vice president/marketing for Allendale, is projecting world wheat ending stocks for 2009-10 at 166 million tonnes, versus present estimates of 148 million tonnes. Although acreage will be down, so will consumption, he said. The "big culprit" in the large projected ending stocks, is the huge carry-in stocks.

 

The result will be ample supplies for feed wheat through much of 2009, and it will remain "a major competitor," Victor said.

 

"As long as it's priced cheaper than corn, and there's this abundant supply throughout the world, end users can shop closer to home versus going transatlantic or transpacific to get it," Victor said.

 

But some analysts don't buy into the feed wheat argument. Vic Lespinasse, analyst for grainanalyst.com, said the presence of feed wheat was going to be factor and a competitor of corn regardless of whether Argentina was in a drought. But the bottom line is that severe drought damage still would result in less grain in the world market, which is supportive for prices, he said.

 

"I don't see how you can say it doesn't matter. It does matter," Lespinasse said.

 

There is also not universal agreement that feed wheat remains a strong threat to corn.

 

"I have two very good sources who say that the feed wheat availability from the Black Sea region is no longer there," said Mike Zuzolo, senior analyst for Risk Management Commodities. "This causes me to believe the trade is going to keep wheat over $2 premium to corn and thereby not allow it to be a feed competitor any longer to the corn."

 

Henderson says feed wheat prices in the Black Sea region have rallied but that "it still seems like it's an issue."

 

The other issue that will limit US corn producers to take advantage of the opportunity created by the Argentina drought, Henderson said, is that corn demand in general is in a malaise, both domestically and abroad, amid a worldwide recession.

 

"There's just not many users of corn who are making any money," Henderson said. "Look at ethanol, look at hogs, look at cattle, look at milk; it's just hard finding the major users of corn that are making money right now."

 

Another obstacle, Victor said, is Brazil. The nation has significantly increased corn production in recent years and projected stocks there are more than 8 million tonnes, compared with 3 million to 4 million tonnes in 2004, 2005 and 2006.

 

The nation is on the verge of overtaking Argentina as the world's second-largest corn producer, Victor said. And it "does not have near the weather problem that Argentina has."

 

"Brazil is becoming a major force to be reckoned with," Victor said.

 

US exports have been very poor throughout the marketing year until recently. The US Department of Agriculture has reported net weekly sales exceeding 1 million metric tonnes two weeks in a row. But sales are still far behind last year's pace, analysts note.