FBA Issue 29: November / December 2009
Global grain markets: Cool summers, frosty harvests & bullish corn
by Eric J. BROOKS
Helped along by autumn frost frost, moisture and a falling US dollar, grains and oil seeds enjoyed a substantial, but somewhat muted rally. Between the two, corn jumped higher, encountered more resistance but has better long term prospects. Below, we examine the dynamics of this post harvest time frost's impact on corn and soy.
Frost damages corn, China looks to Latin American soy
For US corn, autumn's first frost arrived notably earlier than usual. Before the corn and soy harvests were even a third completed, mid October saw freezing -2ºC to -10ºC nights over much of the Midwest. It ended the growing season for unripe corn and to a lessor extent, soy.  It caused more damage than most early frosts because it follows delayed spring planting and a cool, rainy summer that delayed crop growth. In all, approximately 5 million tonnes of corn was lost. That reduces this year's American harvest by 1.5 percent, from about 330 million tonnes to 325 million. 
Similarly, the about 1.5 percent of a more bountiful, more mature soy crop was also damaged. Prior to the frost, the US soy crop was forecast at 88.6 million tonnes but it will now be closer to 87 million.  Earlier in the third quarter, a high volume of exports to China brought American corn inventories to unexpectedly low levels.
In the same vein, a recent USDA report notes that an expected 0.76 million tonne increase in soy stocks was almost completely wiped out by a 0.68 million tonne increase in exports. As a result, the USDA estimates October American soybean stocks to inch up from just 7.3 million tonnes to a mere 7.7 million tonnes.
On the whole however, soy's international market signals are more mixed. On one hand, in late September, China stated that it intended to buy far less soy in October.  On the other hand, by October 13, Beijing stated that it intends to continue stockpiling soybeans, rapeseed and corn, which implies the need to import more soy.
Yet, wary of being overly dependent on the United States (and assuming next year's South American crop is adequate), China is winding down its US soy import spree. Chinese traders already report the booking of delivery slots for South American grain shipments for April and May, when the Latin American harvest will be ready. Nevertheless, while Brazil and Argentina's crop is growing in the fields, it is assumed that it will continue to need US soy for late 2009 and early 2010 delivery.
On the whole, while soy has had a better year, going forward, corn has more upward momentum. This can be seen in their recent relative performances. Corn jumped 27 percent from its late September minimum to late October peak, whereas soy rose a still respectable but much smaller 9.5 percent.
Soy inventories to recover, corn becoming scarcer
At the very least, as the US soy crop comes in and South America starts a new growing season, rock bottom US and Latin American inventories underpinning this year's soy rally should start to rebound.  Furthermore, while soy exports grabbed most of this year's attention, corn's performance is underrated.
For example, while US ethanol production is down, by the first week of October, American corn exports amounted to 10.9 percent more than for the first 10 months of 2008, when the average price was much higher. Not surprisingly, the USDA expects 2010's average soy price to be lower than this year's but corn's to rise.
Inventory-wise, the situation with global corn supplies looks increasingly precarious. In order to meet a drought-stricken harvest's supply shortfall, China looks set to exhaust the 35 million tonnes of corn it stockpiled from the previous year's record crop. That will leave Beijing's state reserves at nearly the same, very low levels they were in early 2008.
In India, a summer of growth-stunting drought was followed by untimely, pre-harvest rains that have further reduced its sugar, corn, soy and wheat crops. Indian corn exports in particular have been hit. Similarly, the Philippines, which usually imports corn, was thought to have a marginal surplus for export but was then hit by two typhoons in two weeks.
Nevertheless, corn's real emerging supply tightness is in the United States. In late October, Arlan Suderland, an analyst with Farm Futures LLC reported that, "We've traded above it [US$10] in each of the previous two sessions, but soy has yet to close above it. Suderland believes the US$10/bushel is "an area of significant resistance" for soy and that it may be incapable of exceeding this price.
Farmers selling but little corn left to fill US supply pipeline
In addition, harvest delays are thinning out a corn supply pipeline that is already operating on a low inventory base. Mike Zuzolo, president of Lafayette, Indiana based Global Analytics & Consulting LLC states that, "Harvest delays equal field losses at this point and this is not fully priced into futures yet."
Why has the market not fully priced such harvest delays into corn futures? With many US farmers having paid $800-$1,000/tonne for fertilizer, early autumn saw US farmers, worried that corn may not rise higher, sell off crops to cover expenses. Over the short-term, selling pressure arising from farmers' need to mitigate avoid losses took the wind out of corn's tightening fundamentals.
Granted, this American corn harvest is second largest on record. Nevertheless, a rainy spring planting season, moist summer and early frost means that almost all of this year's US corn must be put through a grain dryer.
This added step will create backlogs at US grain elevators and delay corn's journey from harvest to market. That, on its own, removes the new crop's downward pressure on prices. Moreover, despite US corn's large harvest, suboptimal growing conditions have impacted the quality of this year's crop.
Furthermore, this corn supply bottleneck occurred when US summer ending corn stocks were a mere 42.5 million tonnes. On average, America consumes 28 million tonnes of corn per month. With the harvest delayed by over 30 days and only 44 days of corn in reserve, the supply pipeline contains very little corn to flow through to the feed, ethanol and deep processing sectors in a timely manner. Naturally, this creates sporadic shortfalls and upward price pressure.
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