March 5, 2014
Russia backs off but feed grains, palm & oilseeds keep tightening up
A constellation of factors including droughts, thin US inventories, technical buying, biofuel policies and congested Latin American ports continue to push up the cost of feed crops and palm oil.
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
With Russia's president announcing it had no immediate plans for its troops to go beyond Crimea and invade the rest of Ukraine, one would have expected feed crop prices to fall, but in this case, they did not.
Ethanol expectations, technical buying, wilting wheat crops push up grains
Instead, with America taking stock of an increasingly damaged winter wheat harvest and its EPA expected to keep its mandated ethanol production quota at a high level, corn rose 2.9% and wheat 1.9% respectively.
Indeed, with corn rising to its highest level since August 2013 and exceeding its 200-day moving average for the first time in 14 months, automated technical buying kicked in, pushing corn up to US$4.84/bushel before it fell back to US$4.81/bushel -but still a far cry from the near US$4.00/bushel level widely predicted a few months ago.
Wheat also exceeded its own 200-day moving average and at US$6.38/bushel, was at its highest price in three months. Caught between cold weather in the northern US Midwest and drought in the southern plains, a significant downgrade to USDA wheat estimates is now widely expected.
Hence, a combination of increasingly bullish sentiment and automated technical buying to push up the cost of corn and wheat.
But on the bearish side, the first two trading days of this week saw an unusually large volume of farmers selling in US cash corn markets. This implies that at ground level, some sellers fear that if after much speculation to the contrary, the EPA could still cut America's ethanol production quota, which would have a resoundingly deflationary impact on feed grain markets.
Sparse US soy supplies, drought in the south, Latin American logistics
The oilseed complex also defied Russia's peace making gestures and fared well. With America's razor-thin soy inventory (expected to close at 4.1 million tonnes), this according to Country Futures Analyst Darrel Holladay, led to, "continued strength in the Midwest cash soymeal values," adding that, "This continues to create very good soybean crush margins in a tight cash market and that is why we see futures bounce on all price breaks."
Soy got even more support from news coming out of the southern hemisphere: Expected at 90 million+ tonnes less than a month ago, South America's dry weather motivated Oil World to cut its Brazil soy crop estimate to 84 milllion tonnes and Argentina's to 53 million tonnes. Other analysts slashed their Brazilian estimates by less, to the 85 to 87 million tonne range.  -Nevertheless, even by these more optimistic  harvest estimates, some 6 million tonnes of Latin American soy has disappeared from the world market in just six weeks.
As in previous years, Latin American shipment logistics is also doing its part to constrain supplies and jack up prices.  Holladay noted that, "There are strong indications that China has to delay a large amount of Brazilian soybeans that are to be shipped in the next 60 days into July or August, or later." The congestion at Brazilian ports means that the widely anticipated cancellations of US soy export shipments to China has, as of this time, not happened. Between Brazil's arid weather and overburdened ports, the likelihood of bearish export cancellations happening diminishes by the day.
Interplay between palm/oilseed prices, ASEAN drought, energy cost, biofuel output
But if the southern hemisphere's weather is slashing soya bean supplies, equatorial Asia's drought is diminishing the scope for oil complex substitutability: With Southeast Asia's drought entering its third month, Oil World is alerting investors that if the drought persists for another 2 to 3 weeks, both Malaysia and Indonesia could see sharply lower palm oil output in the latter half of this year.
With Brent and West Texas oil prices in the US$103/barrel to 109/barrel range, Malaysia and Indonesia's domestic biodiesel demand is being further accelerated just as the supply situation tightens up. Alan Lim Seong Chun, an analyst with Kenanga Investment Bank Bhd. Notes that, There's "increased demand for biodiesel as Brent-oil prices are boosted by the Ukraine crisis, making a palm-oil biodiesel blend attractively priced in comparison," adding that, "Prices are also driven by soy bean price uncertainty due to the drought in Brazil."
With no shocks to world meat demand on the horizon, expect the oilseed market to tighten further with every week Southeast Asia's drought persists. Feed grains however, remain more problematic: Although more inflationary at the moment, the impending US ethanol production quota announcement can kick the market in either direction, depending on the final volume decided.

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