March 7, 2012

Grain prices up as South America crop losses increase

Grains prices continued to climb over the past two weeks, as South American crop losses have been expected to rise.

Oil World now thinks they have lost 14 million tonnes of soy production compared to last year's production. Delays in shipping are also shifting short term Chinese demand to the US.

This tightens the fundamentals significantly. Soy outperformed corn dramatically through February. Looking at the overall price changes in February, soy gained US$1.09, corn gained US$.14 and wheat was up only 3 cents.

The US will need more soy acres than last year to meet anticipated demand. Now that the soy: corn ratio is at 2.23 to 1, North American farmers may switch some acres back to beans. These will likely come out of corn acres.

The US Ag Forum projected the corn carryout at the end of 2012/13 crop year will be 1.616 billion bushel, more than double the 801 million expected for this year. So perhaps corn can afford to give up some acres. USDA expects 94 million acres compared to 91.9 last year and a yield of 164 versus 147.2 last year. What caught traders attention was that usage is expected to increase 765 million bushel from last year, mainly in feed use.

For soy, the report said the soy carryout will fall to 205 million bushel from 275 for the current crop year. This despite a yield estimate of 43.9 bushel/ac, compared to 41.5 last year. Usage is expected to be up a sharp 324 million bushel, or nearly 11%, mainly in exports, to make up for the South American shortfall.

The bottom line is that the crop losses in South America make US weather and crop size that much more critical. Corn prices in parts of China are at record highs, so expect them to import more corn to ease the tightness there. The last thing the Chinese regime wants is a shortage of food, or severely overpriced food. The only solution is to buy more, and they have the US dollars to do it.

Outside markets were supportive also, as the US dollar dropped, and most other commodities gained. Stocks in the US traded to their best levels since June 2008.