PRICES CRASH – BUT LET’S GET THIS IN CONTEXT

A couple of weeks ago the markets were agog that we would see $9/bushel corn.  Now it’s all disaster as some frankly weird data from the USDA suggest that corn stocks are higher than expected and so is the acreage. 

Corn December futures dropped to $6.58 while wheat dropped below corn to $6.33 – the first time wheat has been below corn since 1984.

In its inimitable way the popular media are now forecasting cheaper food prices. Wow! The G20 only had to meet and prices came down!  Those of us talking about a serious world food crisis? Well it look like we have egg on our faces, or at least a lot of  corn.

But wait a minute, folks, before you get carried away by the bears.  You’ll notice from the futures price chart that we’re only back at around May, and the $9 hype was exactly that.  Corn has never reached $9 and probably wasn’t going to given that we’d already seen that wheat was substituting for corn, the crude oil price was coming back into the $100/barrel range and that Russian was already planning to re-export wheat.  Nothing here the real smart ones didn’t know about.

The other point to make is that corn and wheat over $6/bushel is still a good price for farmers and a tough one for consumers.  The decade 2000-10 average price for corn is $2.78; at a previous peak in  2008 it reached $5.48 in June of that year.  So corn is historically expensive even with the sell-off.

Wheat is in a slightly different situation.  The 2008 peak was $8 and since then the price has slumped somewhat.  But even so the decade average is $4.74 so current wheat prices are not particularly cheap either. A glance at the chart shows that the actual case (unless you are a short-term trader) is that both commodities have trended upwards in the last few months based on some basic fundamentals.

What’s interesting is that USDA has reported not on the overall world supply demand situation for either crop, but only on corn stocks and acreages.  USDA may well have over-estimated the area at 92 million acres (4 million more than last year and the highest on record since 1944) by not including areas flooded since the survey was completed; next month will see an up-date so be prepared for that.

USDA also said that stocks were 3.67 billion bushels, actually 15% down on this time last year, but 11% higher than the trade itself was saying.  So the price correction comes purely from the statistical inaccuracy of the analysts rather than the basic underlying data.

Of course the USA dominates the world corn market, so these detailed numbers are critical and are the basis for trading.  But for those interested in a wider perspective, both for planning projects and looking at investments, here’s what the supply-demand balances say:

For corn, the old crop supply has increased but so has demand both in North America and China.  World corn trade has remained somewhat flat because the largest importers (in Asia) have done better with their own production.  Even Africa has had some productivity successes. But the old crop stock:demand ratio is at it lowest for some time, so we think the market has over-reacted to the USDA report.  Equally by far the largest volume of corn is in China and it remains to be seen whether floods there have damaged physical stocks.  Overall on the world scene while stocks will probably build in the next 12 months there is no room for complacency. even re-built stocks will still not reach the levels of a couple of years ago, and a great deal will depend on the demand for ethanol and hence ultimately the crude price.

Turning to wheat, the key feature is the re-emergence of Russia as an exporter, but that fact is already built into the price. Nevertheless, the supply side look better though for this year it remains behind demand.  Stocks are being pulled down with the price competitiveness against corn and longer-run a normal price premium will be re-established. Wheat is finely enough balanced that a lower than expected harvest will firm prices.

Our bottom line is that we should treat the current dip with some skepticism and look overall at the world grain supply situation. It is by no means dire, but neither is there so much grain around that everyone can relax and pat themselves on the back for solving the food crisis.