Wednesday, May 13, 2009
The Debts of the Spenders: The Soy and Corn Story
It may be time for the grain bulls to take some profit off the table. I already did myself. Despite its fundamental flaws, the dollar remains very oversold. Caveat - if the Feds increase bond purchases then the dollar could very well remain at subdued levels for a while longer.
The grains story continues to be dominated by the soybeans - corn relationship. Soybeans had remained in a somewhat bearish stance until a few years ago due to the glut of projected supply from S. America (mainly Brazil and Argentina) as well as the US. However, that story started changing about 2 years ago when farmers - possessed by tales of magical profits in the ethanol boom - (remember one year ago?) switched over to corn and sugar.
The resulting soy acreage was replaced by corn. Naturally, as THE hyped commodity, corn was the first to fall at the end of last summer. But all grains suffered. Now market prices are just beginning to recover.
Corn is traditionally considered a higher risk/higher reward crop b/c of fertilizer costs. It takes considerably more fertilizer to maximize corn yields than soy. So watch fertilizer prices - as well as oil which is an important feedstock in the production process. Considering the current economic environment, farmers are also less eager to move over to corn as they were last year - especially if you remember how dramatically the grains tanked last fall.
Along w/ENSO wet conditions and Chinese buying, soy looks to be the outperformer of the two (so far) this spring. But if enough farmers switch production to soybeans then there is a potential reversal of the trade.
I expect the corn market to contain a carryover of at least 1.5 billion bushels going into this fall's harvest. This is a comfortable amount. Remember, farmers and hedgers were burned last year and are loathe to resume the bidding frenzy that awoke the normally sleepy pits. One factor that might spark interest among corn bulls are the ethanol laws that mandate corn for ethanol use. Again, watch oil prices closely as higher prices for crude will make ethanol margins profitable again.
Source:
http://www.fas.usda.gov/grain/circular/2009/05-09/graintoc.asp
*PS I am going to do an article on wheat coming soon.
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