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FEED Business Worldwide - August 2012
Corn, soy set price records after a string of disastrous harvests
With plenty of wheat and rice to go round, no one will starve, but if you enjoy eating meat, milk and eggs, your world is now changing: Mid summer saw corn and soy set new price records of US$8.16/bushel and US$17.49/bushel respectively. Corn looks set to enter the US$9-$10/bushel range while soy could fly as high as US$20/bushel.
US corn losses to equal harvests of Brazil, Argentina & Ukraine?
All this was caused by the most serious US drought since 1956. At the time of publication, it had already devastated the corn crop during its critical pollination stage - and appears ready to do equally serious damage to the soy harvest.
Over 100 million tonnes of corn may have withered in America's farm fields.  This could equal the combined harvests of Brazil, Argentina, Ukraine and South Africa, never mind their exports.
The latest US weather forecasts see the drought extending into August, by which time it will have seriously damaged the soy crop during its critical pollination period. At that point, we could, for the first time in history, have an acute shortage of both feed grains and oil seeds at the same time, with both their stocks-to-use ratios falling below 5%.
The rally softened when China threatened to 'sell' for 'profit' imported corn it had earlier bought at US$6/bushel for US$8/bushel. But with domestic corn prices north of US$10/bushel, China was bluffing and in no position to sell corn it so badly needs: Within a week, corn roared back and was last seen near US$8.13/bushel.

The situation could be far more inflationary by the time you read these words. Far from the US$4.50/bushel range they were calling just four months ago, some analysts now see CBOT corn and soy going over US$10/bushel and US$20/bushel respectively. Morgan Stanley, for one, stated that, "We anticipate periods of time in the coming months where corn trades in double-digits [above US$10/bushel]."
Although we frequently disagree with many analysts' forecasts, in this case, they are probably right: We appear to be in a perfect storm of triple coincidences – Both the northern and southern hemisphere suffered two consecutive growing sea seasons of disappointing or disastrous corn and soy harvests. And the second round occurred after both feed crop inventories had fallen to near historical lows.
America's corn and soy inventories could both end up having closing stocks-to-use ratios in the 3% to 4% range. How did we get in such a situation?
Crisis origin: Latin America's horrid harvest
The crisis has its roots in the La Nina dry weather which afflicted South America's 2010-11 corn and soy crops and made for a disappointing fall 2011 US corn harvest, the latter bringing the corn stocks-touse ratio to near 5%. This occurred just as inventories were starting to rebuild from their 2008 lows. With Asian meat demand recovering strongly, an inventory run down of both corn and soy ensued.
With CBOT corn almost touching its record high in mid-2011, high prices encouraged much Latin American corn planting–and made many assume that a bumper Argentine crop would tame corn's price. They overlooked an abrupt halt in Argentine export growth that occurred after 2005, or that Latin America's climate cycle shifted to a drought bias in 2007. In mid-September 2011, we publically doubted South America's capacity to restock world corn inventories, noting that for a rare second consecutive year, a drought inducing cold ocean current was locked in off that continent's coast.
And we got more than we had bargained for: While Argentina's corn exports fell at least 40% below expectations, even we were shocked at how the drought's severity caused the biggest ever recorded fall in global soy production: From the 2010/11 to 2010/11 season, world soy production fell by a whopping 29 million tonnes or 10.9%, to 235.9 million tonnes. Inventories fell by less, from 70.1 million to 51.5 million tonnes. China's 57 million tonne soy import demand overwhelmed world inventories and a price rally was sparked.
But trouble was also building up with corn: In line with our mid-September Latin American drought assumptions, by late 2011, Latin America's drought caused corn, which had started falling below US$6/bushel to rise firmly back up by that year's end. With a third of Argentina's crop decimated and the US stocks-to-use ratio scuttling near 6%, a much anticipated rebuilding of corn inventories never happened. 
The above are excerpts, full versions are only available in FEED Business Worldwide. For subscriptions enquiries, e-mail membership@efeedlink.com
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