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World Production Problems Spell Stronger Prices

August 12, 2010

 Expect tighter supply–demand balances as calculators tally likely production and consumption in Europe and Asia. There’s even a chance national yields will come down a few bushels in the U.S. That could spell even stronger prices, says Jerry Gulke of the Gulke Group.

 

He believes we may see several developments:

* Russian heat wave: Informa Economics peg Russian wheat production at 49 mmt, 20% below last year. In the midst of the worst heat wave in history, Russia has already announced an export embargo as well as distribution of grain from its 9.5 million-ton reserve. It has asked trade partners Belarus and Kazakhastan to follow suit. They have not, but that action remains possible. Exports from surrounding countries also may be down; only Ukraine seems to have escaped the heat and drought. Other grains and oilseeds are affected as well. If it wishes to keep its livestock production stable, Russia may need to import 1 to 3 million mmt. of corn.

* World oilseeds stocks are down, led by reductions in canola in Canada and China but also palm in Asia. China’s soy purchases may be understated by 2 to 4 mmt.

* U.S. yields could wind up lower than previously estimated. The Linn Group is using 162.1 bu./acre for corn—leading to a less than 1-billion-bushel carryout next summer. "We’d need 4 million more acres planted in 2011 just to keep end stocks from falling more," says Gulke.

If your back field looks like paradise, keep in mind that pockets and counties with 100-degree days adding up may not be quite as lush. Consider this recent post on our Money and Markets blog: "The models are coming into alignment for a dome of heat beginning next week over the Upper Plains and Midwest and even into Canada as this forecast page describes: http://blog.chicagoweathercenter.com/2010/07/severe-weather-threatens-in-heat-which-has-already-doubled-last-years-90-degree-tally.html. Many farms in the Southern Plains are already in the 100s. Here in Ohio we (for the most part) have decent subsoil moisture to make it through a short heat wave but some fields are really shallow rooted and anything more than a few days will start nipping at yields. Today through the next seven the Dayton area will top out in the low 90s and high 80s, if the models are right it can only go up after that."

The bottom line: "Fundamentals are beginning to reveal why the technical indicators reversed course this summer and we began August looking much like 2006," says Gulke. "That year, it didn’t look like high prices were in the cards, then energy prices exploded. This year, it is matching supplies of food, feed and fiber with their demand that raises the question of ‘What if’ and suggests caution in selling too much too soon."

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