November 14, 2008

US grain markets pressurised by global bumper wheat harvest


An all time record large global wheat harvest continues to put downward price pressure on US wheat price and abundant feed wheat is undercutting US corn exports.


The USDA lowered the US expected average soy yield to 39.3 bushels per acre giving a crop size of 2.92 billion bushels, down 17 million bushels from the October report. Ending stocks were left unchanged at a tight 205 million bushels. Some industry analysts are predicting a further reduction in national average soy yield in the USDA's final production report due out in early January.


Adding to the bullish tone was a 2.5 million-tonne (about 92 million bushels) drop in Brazil's expected soy production. High production costs and lack of farmer credit is causing Brazilian soy production to shrink a little from last year rather than to increase as was predicted earlier. In the November report, the USDA dropped world demand for soy by 1 percent, but total demand will still be 2 percent greater than last year.


Soy price did improve after release of the report, but the trade remained in a nervous state because of uncertainty about the global economy. The fear is the world will slide into a deep and prolonged recession that will severely reduce demand for animal protein products and grain-based products for human consumption.


Chinese soy crushers have been buying US soy due to an agricultural policy that makes domestic Chinese soy more expensive US imports. There is talk in the trade that the Chinese government will soon level the playing field for Chinese soy growers by taxing soy imports. If that occurs, US soy exports to China will drop.  


US corn exports have been disappointing recently because Black Sea wheat from Ukraine and Russia has been undercutting US corn by about 50 cents per bushel. The feeding of wheat to livestock around the world is projected to increase about one billion bushels from last year when global wheat stocks were at a 30 year low. Adding to the bad news for corn, the USDA decreased corn use for domestic livestock feed in its latest report by 674 million bushels from last year. Even so, the ending stocks to use ratio for corn remained at about 9 percent; still low as compared to usage level.


The slow pace of the US corn harvest; only 71 percent harvested in the last report, may result in weather induced yield reduction. The final corn yield number will be reported in the January USDA report and if it drops will be bullish for corn price. Grain analysts say a higher corn price will be needed to get enough acres of corn planted in the spring to meet next year's demand for corn.   


Another unknown is the US demand for corn to make ethanol. Ethanol price is now above the price of blending gasoline which means the Renewable Fuel Standard mandate and blender's tax credit are driving demand. Ethanol stocks are increasing and ethanol plants are cutting back on capacity utilization. It is likely the USDA will lower estimated corn usage for ethanol production in its next report.  


Wheat producers around the world responded to unprecedented high wheat prices by increasing area planted this year and the weather cooperated. Global wheat production for 2008/09 is now estimated to be 682.4 million tonnes, the largest wheat harvest in the history of the world. It appears the huge supply is slowly being absorbed by the marketplace for livestock feeding, to fill a depleted pipeline, and to replenish safety stocks in some countries. Even with all the wheat, there is a relative shortage of high quality milling wheat. The USDA increased its estimate of US grown hard red winter wheat exports this month and lowered ending stocks again to reflect the strong global demand for milling wheat. Countries in the Middle East are active buyers of US wheat because a severe drought devastated the wheat crop in that region of the world.


Due to dry conditions during the reproductive period in Argentina and Australia, the USDA lowered estimated production in both of those countries; down about 37 million bushels in Argentina and 55 million bushels in Australia. Although the USDA did not report acreage, plantings of hard red winter and soft red winter wheat in the US will be lower this year because of the late corn and soybean harvests and wet field conditions. If global demand for milling wheat holds up in a recessionary market and when stocks of feed wheat are used up, wheat price should rally.

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