Insight: World demand to keep grain prices high

27 October 2010 17:08  [Source: ICIS news]

By Frank Zaworski

HOUSTON (ICIS)--In the midst of historically-huge harvests of US corn and soybeans, grain prices are rallying at a time when abundance typically triggers a big drop in crop value.

The law of supply and demand has gone off and hidden under a rock while US farmers harvest the largest soybean and third-largest corn crops ever.

At a time when grain prices traditionally take a seasonal dip, corn prices are up 25% since 1 October, and soybeans have increased $2/bushel since mid-August.

Agricultural economists say increasing demand and a few other factors have been responsible for the spike in prices, and will keep prices high well into 2011.

World grain prices, already trending higher, zoomed upward in August as drought conditions in northern Europe and western Asia hammered wheat production, prompting Russia to announce a ban on wheat exports. Production difficulties in Australia added to the fire. Traders, anticipating that corn would replace wheat in European and Asian livestock rations, bid corn up to its highest level since 2008.

“Corn production is not keeping up with demand, and foreign buyers want US soybeans,” said Iowa State University economist Chad Hart.

The US Department of Agriculture (USDA) in October estimated 2010 US corn production at 12.7bn bushels, down 4% from its September assessment. With 2010 marketing year corn use estimated by the USDA at 13.5bn bushels, commodity traders jumped on the news to send futures prices higher.

At the same time, livestock farmers, ethanol producers, foreign buyers and food businesses are expected to lift demand in the coming year.

The recent approval by the US Environmental Protection Agency to increase the ethanol blend rate in gasoline from 10% to 15%, for example, would theoretically create a need for an additional 400m bushels of corn.

The ethanol industry, however, does not currently have the infrastructure in place to broadly deliver E15 to the marketplace.

Ethanol industry deficiencies aside, improving economies in the developing world are prompting higher protein diets, hence a greater demand for corn to feed cattle, chickens, hogs and sheep.

So how much grain will need to be produced in 2011 to meet world needs? That depends on the size of stocks at the end of the current year and estimated demand, economists say.

“The size of the market will be influenced by the strength of demand, the size of crops in the southern hemisphere and 2011 production prospects in the rest of the northern hemisphere,” said Illinois University economist Darrel Good.

As a starting point for corn, assume that 2010-11 marketing year-ending stocks total 902m bushels as currently projected by USDA; that 2011-12 marketing year consumption will decline modestly to 13.4bn bushels as feed and residual use declines from the inflated projection for this year, and combined processing and exports increase; and that the desired level of 2011-12 marketing year-ending stocks is 1.2bn bushels, Good said.

“Under that scenario, the 2011 US crop would need to total 13.688bn bushels. With a 2011 yield at the trend value of 160 bushels, harvested acreage would need to total 85.55m acres. Allowing for silage and abandonment, planted acreage of 92.55m would be needed, 4.328m more than planted in 2010,” he said.

For soybeans, 2010-11 marketing year-ending stocks of 265m bushels, 2011-12 consumption of 3.325bn bushels and 2011-12 year-ending stocks of 250m bushels would require a crop of 3.3bn bushels.

A 2011 yield near the trend value of 43.2 bushels would require harvested acreage of 76.389m and planted acreage of 77.389m, 325,000 fewer than planted in 2010, Good said.

Combined acreage of corn and soybeans may need to increase by 4m-5m acres or more in 2011. To attract that many acres away from other crops such as wheat, prices for corn and soybeans will have to remain high.

“High prices for other crops suggest there will be competition for acreage in 2011,” Good said.

Prices are likely to remain high well into 2011, bolstered by increasing demand as noted above, and a weak dollar that makes US grain attractive to foreign buyers.

US-based ADM, a major biofuels producer, said this week that the price of corn will remain in the $5-6/bushel range until at least August of 2011 on the basis of China being net short of corn and its continuance as a prominent buyer in the global market.

While it is easy to be bullish on commodity prices these days, it is important to remember the lessons of 2008. If prices go too high, markets can collapse in a hurry as livestock producers reduce herds, ethanol plants close and skittish investors run screaming for the exits.

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By: Frank Zaworski
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