Saturday, June 6, 2009

The Debts of the Spenders: A Tale of Two Markets - Corn, Meats, and Contango

Keep in mind the historical corn prices. Traders should exercise caution ahead. On one hand we have continued bullish momentum built into the weather. But on the other hand, we have contiued deflationary pressures on consumer consumption of meat.

Lingering concerns over the pig flu remain although I continue to believe that is an overreaction. Instead, the action in meats has been indicative of a more accurate macro-economic view of the ground level realities in the US.

Oh, one more thing to consider is that unlike oil, agriculture has NOT been in contango for months (e.g. big institutions storing supplies in tankers until the futures price exceeds spot). This means that the picture is not distorted by big funds pumping their positions for selfish gain (ahem...Government Sucks).

US Corn Crop Will Likely Not Meet Projected Levels - Study

The 2009 U.S. corn crop will likely be about 6.5% below projected levels because of late planting in key producing states, University of Illinois researchers said late Thursday.

In a report for the University of Illinois’s Department of Agricultural and Consumer Economics, researchers Scott Irwin, Darrel Good and Mike Tannura said under average summer weather conditions, the 2009 crop production could only be 11.3 billion bushels, with a yield of 148.6 bushels per acre. This is compared to the U.S. Department of Agriculture’s projected output of 12.09 billion bushels and yield of 155.4 bushels per acre from the May supply/demand report.

In 2008, corn production was 12.1 billion bushels, so the projected drop would be 6.6%.
The three researchers used Illinois, Indiana and Iowa in their study to project U.S. yields under three types of weather scenarios. These three states typically represent 40% of U.S. production and the researcher said crop weather forecasts have only been developed for these three states.

Excessive rain in the eastern corn belt has caused many planting delays, and about 30% of the U.S. acreage was planted after the optimal planting date of May 20. “The general lateness of planting and the large discrepancy in planting progress by region raises additional questions about the potential U.S. average corn yield in 2009,” the report said.

A soggy spring and widespread fundbuying continues to push Chicago Board of Trade corn futures to new highs, but some analysts say the market will eventually have to reckon with some bearish news on the demand side.

The livestock sector, which has been struggling for months due to the recession, has lately been getting even worse. The fallout will mean continuing weak feed demand for corn, likely through the end of 2009 if not longer, analysts said.

About 45% of the corn crop goes toward feed and residual use, according to the U.S. Department of Agriculture. Problems with the industry are the “canary in the mineshaft” that shows how
the recession could impact corn, said John Kleist, broker/analyst for Allendale.

The sector’s woes are widespread, from cattle to dairy cows to pork, and are directly tied to the recession, analysts said. Most recently Chicago Mercantile Exchange hog futures have been under intense pressure. Prices have dropped significantly, and agricultural lenders say they may have to force hog producers to either trim their herds or liquidate completely.
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