Death comes to us all. Life's but a walking shadow | It seems to me that the futures market no longer really prices the future supply of grain but rather prices the current supply against future consumption. It pretty much assumes that the future supply will be the maximum projected. For example if the USDA predicts there will be 90 million acres planted and the trend yield is 169 bu/A the market dials in a production of 15.2 billion bushel until it's proven otherwise. Likewise, if CONAB says Brazil's soybean production will be 100 MMT then it's 100 MMT until it's not.
With this in mind, the next 90 days will put us into mid-May. There will be three major "reveals" by then.
First, we are just about past the period of peak rainfall for Brazil. Even in a non-El Nino year rainfall declines from now until May. Brazil is now in the pod-fill period and pod-fill will be delayed for some percentage of Brazil's full season soybeans. Pod-fill for those late planted fields will stretch into late March and will be especially vulnerable to dry weather. We already know that yield in Mato Grosso will likely be off by 15-20%, We know that yield in Parana is also likely to be off by 15-18%. While the acres are small, the crop in northern, eastern Brazil can't be that good. While we know that Brazil's soybean acres was supposedly 6% higher this year even that won't make up for the suspected shortfalls. (I, myself wonder if the strength in the soybean market hasn't in fact been a reflection of Brazil's crop potential.)
Second, in order to plant more soybean acres Brazil probably reduced it's first crop corn acres and much of that has been affected by the dry weather. We saw a hint of this as the State of Goias threatening to invoke a 17% export tax on corn "supposedly" at the request of livestock producers. We know that Goias was one of those areas hardest hit by the early dry. What's that tell you? Now, Brazil's planting it's second crop corn as the dry period approaches. If the rainfall declines early that corn crop is vulnerable. Furthermore if you make a detailed inspection of the Feb16 WASDE what you see is that pratically everywhere else in the world except the US and China there is a very substantial decline in corn stocks from last year. For example, China is up 19 MMT & the US is up 11 MMT but the total world stocks is only up 1.5 MMT. That means that everybody else is 30-1.5 or down 28.5 MMT. Now the fact is China's extra 19 MMT isn't for sale and can't be for sale because it was put into storage at $8/bu.
Third, in late March we are going to get the first indication about prospective US crop acres. In a few days the spring insurance price will set in the neighborhood of $3.80-3.90 which will effectively peg the harvest price short of a weather scare this summer. Despite the fact that fertilizer prices have fallen I will be very surprised if more than last year's corn acres gets planted because there's simply not as much money available to buy inputs and more resistance to loan that money.
And finally, the price of corn here now depends on the price of gasoline and the price of crude oil. There are indications that the price of crude has bottomed and may begin to recover in the next few months. While there will be a lag as the ethanol plants recover their losses as the price of crude and gasoline increases the ethanol margin will increase and may allow a modest increase in the price of corn as well.
In short there are reasons why the price of corn may increase in the coming months.
For what it's worth. |
What makes you bullish grains the next 90 days?
