FEED Business Worldwide March, 2012
Three feed inputs, one weather system, two outcomes & the power of ocean currents
by Eric J. BROOKS
One curious aspect of South American weather is that what is good for one feed input can be bad for another. Consequently, to trade successfully in grains, you will have no choice but to acclimatize yourself to the El Niño/La Niña Southern Oscillation (ENSO) ocean current cycle. Considered a minor, regional oddity twenty years ago, ENSO today drives the prices of key feed inputs.
This is because South America has gone from proving a tenth of corn and soy exports thirty years ago to roughly half today, and supplies more than two-thirds of fishmeal exports. As the world comes to depend on South America for the majority of its feed inputs, this continent's peculiar weather systems will induce price volatility patterns never seen before. With most of South America's feed-related exports going to Asia, this continent is being linked to South America's climate oddities like never before.
In 2009/10, an El Niño warm water current boosted rainfall and led to bumper corn and soy crops, thereby helping depressing feed crop prices for most of 2009. - However, that same El Niño warm water decimated anchovy stocks. The resulting fishmeal shortage was later made worse by Chile's earthquake, and helped to set a price record within a year of the warm water current's appearance off Peru.
Now however, the opposite situation is underway: A cold La Niña current has boosted fishmeal output but appears poised to decimate Argentina's corn harvest and curtail the continent's soy exports too. (just as we predicted it would in eFeedLink's mid-September grain market report). As a rare, second consecutive year of cold water off South America's Pacific coast, it is impacting both corn and fishmeal prices in opposite directions for an exceptional second year running.
La Niña: Bullish for corn
Indeed, while our last grain report declared "all eyes on Argentina", it seems that the market is staring even harder at the country's corn and soy crops at this time. Led by leading its heartland agricultural province Cordoba, a number of Argentina's leading corn and soy producing areas have declared a state of drought emergency.
The USDA's marginal January downgrading of Argentina's corn harvest by 3 million tonnes to 26 million tonnes and exports by 1.5 million tonnes to 18.5 million has looked more conservative with every passing week. The country's Rosario Grains Exchange has cut its corn harvest estimate far more radically, to 21.4 million tonnes, far below the record harvest of 29 million tonnes expected at the growing season's start.
Ignacio Labaqui, an analyst with New York-based Medley Global Advisors stated that, "As a consequence of the drought…in the case of corn, analysts expect a 20 percent fall [to 23 million tonnes]." Whichever way you look at it, the USDA still expects 18.5 million tonnes of corn exports but most analyst estimates imply that no more than 16 to 17 million tonnes will be available - In fact, this late in the growing season, it would take a near-miraculous late summer rainfall episode to boost this outcome.
With months of arid weather and near 40C temperatures burning off whatever scant rain fell, the drought has reached a crisis point: While colder, rainier weather is expected, farmers state that at least 100mm of rain must fall to revive their parched fields. Skepticism that this minimal sum of precipitation will be achieved has firmed up CBOT corn prices, which currently stand slightly above US$6/bushel.
Should this weekend's rain opportunity be missed, it would be very difficult to forestall the bullish market implications. - Similar La Niña-induced Argentine dry spells led to market rallies and disappointing exports both last year and in 2008.
La Niña: Bearish for fishmeal
Interestingly, the same cold ocean current that has kicked South America into drought is also reviving its anchovy catch and by doing so, giving fishmeal buyers their first glimmer of hope in years. Estimated by the International Fishmeal and Fish Oil Organization (IFFO) at 7.12 million tonnes, Peru's anchovy catch climbed a whopping 215.8% from 2010's 3.3 million tonnes. Chile's catch is up a more subdued but still buoyant 9.6% to 2.73 million tonnes, up sharply from 2010's 2.49 million tonnes.
Although the combined anchovy feedstock catch of Denmark, Iceland and Norway fell by 26.5%, they only account for less than 15% of the top four producer's world catch, while Chile and Peru make up approximately 85% of the top four's supply contribution. Consequently, the top four's overall fishmeal feedstock catch jumped a healthy 42.8%, from 8.067 million tonnes in 2010 to 11.519 million tonnes in 2011.
With abundant anchovy supplies streaming in, the IFFO reports that Peru's 2011 fishmeal production jumped 116.6% to 1.642 million tonnes, from 2010's 0.758 million tonnes. Offsetting the North Atlantic's 21% output drop, Peru's performance boosted the top four's 2011 world fishmeal output by 43%, from 2010's 1.70 million tonnes to 2.44 million tonnes in 2011.
This has made fishmeal fall by 35% from its US$2,000/tonne record highs of April 2010 to approximately US$1,300/tonne today. The fact China is sitting on 175,000 tonnes of fishmeal in its port inventory but is currently not very active in the market is itself telling. - With late 2011 and early 2012's Peruvian catch again boosted by favourable cold water currents, it expects supplies to be plentiful well into 2012's aquaculture season, and is no hurry to restock too quickly.
With the cold water persisting off South America into at least February 2012, this implies that this year's April and December catches should also be bountiful. This grants buyers a year of relatively abundant supplies and sane prices. Nevertheless with fishmeal inventories entering this year at historical lows, restocking implies that despite this year's abundance, prices will probably stay north of US$1,000/tonne.
…but El Niño has the Exact Opposite Effect
What is interesting is not merely how La Niña's cold waters off South America are boosting anchovy numbers, fishmeal output and curtailing corn exports for the second year in a row. On the other hand, the warm water El Niño ocean currents also yields interesting, though entirely opposite results.
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