Grain Market Takes Its Medicine


There's an old saying in the market that "the cure for low prices is low prices." This brings to mind another adage: "Be careful what you wish for."
Nobody, at least if they grow a crop, wants lower prices. But when high prices are needed to ration demand, as happed in the wake of the 2012 crop, it can take time for buyers to return. Some end users learned to switch to substitutes, while others found new sources of supply.
In the corn trade, high prices kept U.S. grain off the world market last year, sending exports to their lowest level in four decades. Some of our customers, notably Japan, worked more feed wheat into rations. Others, including China, pushed bureaucratic buttons to permit imports from new originations. China is just starting to import corn in growing quantities and doesn't want to be limited to U.S. supplies. So, approvals are in place, or under negotiation, to allow imports from Brazil, Argentina and Ukraine, which loaded out its first shipment to China in October.

High prices in the U.S. also lured more acres into production worldwide. The cost of corn delivered from Brazil and Ukraine into Asia remains cheaper than U.S. shipments, despite the big break in prices over the past year. U.S. export sales are bouncing back from depressed 2012 levels – USDA recently announced more than 208 million bushels were sold during a three-week period in October. Total 2013 crop sales could hit 1.3 billion bushels, up 75% from 2012. But that total would still be the second lowest on record since 1985. The story with domestic usage is similar. Livestock herds are rebuilding after culls caused by high feed costs. Egg and beef production, along with hatchings of broiler chicks were up 3% in September from 2012 levels. Pork production fell, but weights were up, as lower priced corn began working into rations. Rebuilding the nation's cattle herd is a long process, however.
Ethanol is a good news/bad news story, too. Production in the first two months of the 2013 marketing year is up 6.1% from last year. But questions over the future of the Renewable Fuels Standards linger, with a decision on a potential cut in the mandate expected in November from the EPA.
Added together, these developments should convince USDA to increase its estimate of 2013 crop demand when the agency publishes its first monthly report since September on Nov. 8. Trouble is, the size of the crop could grow too. Farm Futures estimates production at 14.052 billion bushels, easily an all-time record that could increase ending stocks to 1.8 billion bushels.
And our estimate is one of the most optimistic around. Barring major bullish surprises from USDA on acreage or yield, prices look like they'll struggle in 2014. The corn market is taking "the cure," and healing won't be easy or painless.

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