Grain Markets Ripe for Rallies

Tight ending stocks for the grains complex, combined with little to no rationing of supply or demand (oilseeds in particular) means conditions are ripe for market rallies in 2004, especially if China’s grain import demand continues, and if there happens to be a production “hiccup” among the major grain buying and selling countries.

“I don’t think the corn prices have put in their highs yet, or wheat prices have put in their highs yet or soybean prices have put in their highs yet.  Does that mean I am a raging bull? No. I think there is going to be lots of action, lots of excitement in these markets,” says Mike Krueger, who runs The Money Farm, a market advisory service. Krueger was a speaker at both annual meetings recently of the N.D. Grain Growers Association held in Bismarck, and the MN Wheat and Barley Growers Associations, held in Grand Forks.

Krueger says that one significant aspect of last year’s growing season that will carry over well into this year is the difference between corn and soybean yields throughout the country. “Corn was phenomenal, record yields reflecting a record crop and right across the road, soybean yields were terrible.”

The result was the production of a 10.3 billion bushel corn crop.  And that big pile looks to be offset by big demand. “The 10 billion-bushel corn crop is a record. A lot of analysts say it better be the norm from now on because we are going to use that much,” says Krueger.  “My feeling is that we will have corn stocks (at the end of the 2003-04 marketing year) right around a billion, or 1.1 billion bushels. That is not necessarily by itself bullish in the short run. But I think that in conjunction with the fact that I think the wheat and soybean market aren’t done going up yet, and are going to pull corn up with it. I also think there are some things out there working in the market place, particularly with China that is going to give us an additional rally in corn as well.”

At the world level, corn supplies are the smallest since 1976-77 and they reduced those in today’s report. World barley supplies are also at their lowest level in a decade.  Course or feed grains (barley, oats, corn, sorghum) as a whole are at their smallest level since 1960-61. Krueger says one of the reasons why this hasn’t yet manifested itself in a big course grains rally is that a year ago, there was a huge amount of feed wheat trade in world markets. But now those feed wheat stocks have been drawn down. Brazil also has a limited amount of corn to sell and there is no other place to get it, he points out.

World Coarse Grains Ending Supplies

World Soybeans

World Wheat Ending Supply

Ethanol is another factor that will keep corn use high. “Two years ago we used 600-700 million bushels of corn in ethanol production in this country.  This year it will exceed a billion bushels.  When they sign the energy bill, it will mandate that by the year 2012, we go to an excess of 2 billion bushels of corn used in ethanol production.  That will be more corn than we have exported in the last three to four years.  All of a sudden the corn market in the U.S. is almost going to become a domestic market, not nearly as reliant as exports as it has been in the past.” 

Krueger says that between the last year’s August and October soybean production reports, the USDA took 400 million bushels out of the soybean crop, or 6 bu/acre.  “That is an unheard of drop in production in that amount of time,” he says. “Another important thing, is that in five consecutive years in this country, we have used more soybeans than we have produced. Every one of those years, the USDA has underestimated demand for soybeans.”

The steady demand for beans continues, with no rationing of dwindling supplies. “I think by the time all is said and done, (USDA) will have to show a number down in the neighborhood of 100 million bushels for ending stocks.”

Brazil and Argentina soybean production will likely set yet another production record this year, together expected to produce about a 60 -million ton crop. Still, consumption is expected to keep pace with supply.  Krueger points out that in 1990, the world produced and consumed 105 million tons of beans. This year, it will be an excess of 200 million tons. “And more importantly, every single year, the world has consumed more than it produced,” Krueger says.

China is going to be the key wild card for corn, soybean and wheat markets.  Soybean demand there has nearly doubled, from 13 million tons in 2000-01 to about 22 million tons now.  Higher production of pork and poultry and consequently soy protein meal has helped spur demand.  Krueger sees world wheat supplies in 2004 declining even with a big 2004 world wheat crop.  That will be due in part to wheat’s use as a feed protein source.

Krueger advises grain producers to consider options as a strategy to take advantage of what will likely be volatile markets with rally opportunities.  See more on using grain options, Betsy’s Bulls and Bears, and consult with a grain market advisor. 

News Briefs

U.S. Wheat to Iraq
AMEROPA, an international grain and fertilizer trading company, recently announced that it completed arrangements with the UN World Food Program and Iraqi Ministry of Trade authorities to deliver 32,000 metric tons of U.S. wheat to Iraq in early 2004. This is a significant event, as it is the first commercial export of U.S. wheat delivered to Iraq in over six years.

According to the company’s announcement, “while this quantity of U.S. wheat is small in comparison to Iraqi wheat import requirements of about 2 million metric tons annually, it is symbolic and represents an opportunity for Iraq to demonstrate that procedures for future wheat purchases will be on a competitive basis in the world market.”

U.S. Wheat Associates chairman Alan Lee says that Iraq is going to be an important market for U.S. wheat, pointing out that Iraq’s imports have gone as high as 3.2 MMT in 2000/01.

Dollar Corrects to Lower Levels in 2003
The U.S. dollar corrected to lower value against other world currencies in 2003, which is helping make U.S. exports – including wheat – more competitive in world markets.  According to the Wall Street Journal, the U.S. dollar dropped 20% against the euro this past year, 34% against the Australian dollar, 18% against the Canadian dollar, and 10% against the Japanese yen.  The newspaper noted that the drop against the yen occurred despite efforts by Japan’s central bank to weaken its own currency.

Pressures pushing the dollar lower include a large current trade deficit, low short-term interest rates compared to other countries, the weak economy, and terrorism threats. Even if some of these indicators turn around, sources cited by the Journal expect that there will still be a lag of several months before the dollar begins to strengthen again.