July 2, 2015
A short-lived feed crop rally fizzles out
Deteriorating US inventory estimates and growing weather is check-mated by large harvests and inventories in other parts of the world.
Eric J. BROOKS
An eFeedLink Exclusive Commentary

Having started their US crop growing season burdened down by large inventories and an unusually fast pace of early crop planting, corn and soy were due to rebound on any weather upsets that show up even in most normal growing seasons. This duly occurred in mid-May to late June, after nearly six weeks of unusually heavy rainfall put corn and soy planting behind schedule.
Rain firms up corn more than soy

More telling is the fact that once prices stopped rising, corn was still trading at its highest level since July 2014, whereas soy's far weaker rally and wheat –despite a much stronger rally– both peaked below their January 2015 level. This is partly due to the fact that soybeans are being dragged down by competition from other oilseeds: Malaysia and Indonesia, which supply 85% of palm oil exports, have seen their production rise 21% in three years.
Consequently, palm oil prices are stuck near US$600/tonne, far below the US$1,000/tonne to US$1,200 tonne range it traded in from 2010 to 2012. Rapeseed, after holding up in price better, has also seen its price slump on the prospect of higher EU harvests offsetting disappointing ones in Canada and Australia.
However, with American soy harvest prospects possibly deteriorating to below the 100 million tonne level (from last 2014-15's record 108 million tonnes and the previous year's 91 million), US soy inventories could fall from this year's estimated 13 million tonnes to a threadbare 6 to 7 million tonne level in 2015-16. While that could provide soy a short-term lift, provided South America's harvest comes in as large as expected, prices would probably sag below US$10/bushel at harvest time and stay down thereafter.
Thin US corn supply counterbalanced by China

Together, these two new developments could reduce end 2014-15 corn stocks to under 45 million tonnes (from the current estimate of 47.65 million) and conceivably push 2015-16 closing inventories to below the critical 40 million tonne level.
On one hand, that would put America's closing 2015-16 corn stocks-to-use ratio to a historically low (but not acutely critical) level, below 11.5%. Rabobank and several other market observers warn that with yields on course to fall 5% from last year's record levels, the US supply chain could see, "substantial demand rationing", during the fourth quarter.
On the other hand, with China's harvest rising 7.4% on-year to a record 230 million tonnes (versus domestic consumption of 220 million tonnes), its disappointing import demand and bloated corn inventories limit CBOT corn's potential.
Wheat market overplays EU dryness
Corn also lost a critical source of support in the wheat market. It initially rose more quickly than either corn or soy but has now fallen more steeply, too. Earlier, because heavy rains in America's Midwest coincided with dry conditions in Europe, wheat's rally from US$5.00/bushel in mid-June to over US$6.20/bushel by the month's end did as much to pull up corn as America's deteriorating harvest prospects did.
However, wheat entered July on a price downturn sharper than that of soy, crashing nearly 5% over two trading sessions at the turn of the month, from US$6.17/bushel to US$5.88/bushel. It retreated after the USDA's mid-year upward revisions to wheat crop acreage and production coincided with the following market realization: Even with the EU wheat harvest down by up to 7% or 10 million tonnes from last year's 150 million tonne total, a smaller EU crop can be easily offset by high world inventories and rising US wheat harvest estimates. Analyst firm R.J. O'Brien noted that high USDA American wheat supply estimates resulted in wheat, "Readily relinquishing its risk premium after getting caught up in [European] row crop hysteria."
With wheat's rally fizzling, momentum for additional corn price increases also disappears. All this is not surprising: Bear market rallies are usually sharp, but short-lived affairs -and this one was no exception. With the US having given up much of its corn and soy export market share to Latin America and its biofuel output staying flat, disappointing American feed crop harvests and low inventories do not generate as much inflationary pressure as they once did.
Instead, as we approach the USDA July WASDE report, only a surprisingly bad turn in US growing weather could keep low US corn and soy inventories from being check-mated by the deflation of plentiful feed crop stocks in the rest of the world.
Hence, although corn and soy prices will continue adapting to changing yield expectations, it would probably take a serious upset in Russian and Black Sea grain forecasts, or an intensified, El Nino induced intensification of dry Southeast Asian weather to further boost the cost of feed crops and oilseeds.
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