Market Outlook: Corn Is King, but Crude Is Czar

March 8, 2011 12:04 AM

Corn Is King, but Crude Is Czar

Corn may be king, but crude oil is czar of the universe, says William Lapp, former chief economist for ConAgra Foods and current president of Advanced Economic Solutions LLC in Omaha, Neb. As crude oil prices go, so go the prices of commodities.

"Crude oil has a huge influence on all commodities, including agricultural commodities, and we can’t overlook that," Lapp says.

crude oil jan11Crude oil is likely to trend higher in the early months of 2011, based on the outlook for commodity demand, particularly from developing economies.

"Developing economies have more commodity demands than the rest of the world and want more goods and services," Lapp says.

China alone represents 40% of the cumulative growth in crude oil demand since 2000. Another 8% of crude oil demand comes from other developing countries. OECD countries, including the U.S., Japan, parts of Europe, Australia and Canada, have seen a decline in demand.

Lapp says crude oil prices pushed up to $147 in 2008, then backed down to $32 in March 2009, at the height of the recession. While prices hover in the $72 to $88 range currently, he expects them to trend higher in 2011.

Dark Days for Black Sea Region

Structurally, the Black Sea region has become the primary incremental producer of world grain due to its available arable land. However, the poor environment and unreliable weather are causing and will continue to cause global grain prices to trend higher and with more volatility, says Rabobank Food & Agribusiness Research and Advisory (FAR) global strategist David Nelson, who spearheaded the recent Rabobank report "Looking for Delta: Tectonic Shifts Towards Higher and More Volatile Agricultural Markets."

"The 2010 drought will severely impact grain exports from the Black Sea region for at least one year and probably several more," Nelson says. "As a result, companies that buy, sell and trade crop commodities will need to reconsider balance sheet management factors, such as working capital and risk-management practices."

Further contributing to tighter grain supplies in the region is growing international demand and Russia’s move toward self-sufficiency in chicken and, ultimately, pork production.

"Beyond grain, this also will have a longer-term impact on the protein trade, causing shifting trade patterns and threatening big meat exporters unless new markets are found," Nelson warns.

What's Affecting Wheat Prices

wheat jan11The only real key component of the December World Agricultural Supply and Demand Estimates report is that U.S. and world wheat stocks are above average and corn, soybean and cotton stocks are well below average. Still, volatile market conditions indicate world wheat supply-demand uncertainty for marketing year 2011/12, says Dan O’Brien, Kansas State University ag economist.

Although world wheat ending stocks for 2010/11 are projected at levels markedly above the historic 30-year lows experienced in 2007/08, concerns are building about tightening supplies of food-quality wheat and adequate moisture in critical wheat production areas, O’Brien says. Strong U.S. wheat export shipments in 2010/11 are reflective of and resulting from these market concerns, he adds.

Containerized Grain Exports Rebound

Despite container availability challenges and several rounds of rate increases from carriers during the first half of this year, containerized grain exports recovered in 2010 from the recessionary pressures of 2009.

grain exports jan11Year-to-date shipments were nearly 30% higher than 2009, according to USDA Grain  Transportation reports. These shipments are influenced not only by demand for products overseas but also the competition with bulk ocean freight, which has been relatively inexpensive, according to USDA.

Soybeans continue to be the top containerized grain export, followed by distillers’ grains, which have been in great demand this year,
particularly in China and Vietnam.

Sufficient equipment is becoming available even in locations that typically run a container deficit, such as Minneapolis. Vessel capacity has returned to near pre-recession levels, easing the tight vessel capacity situation. Container manufacturers in China that stopped production in late 2008 and 2009 have increased production again, but not quite to the level of pre-recession demand.

Shippers remain concerned that container availability could tighten in 2011 as import traffic tapers off. Historically, January import traffic continues but is lower than other periods. The shortage of import containers during this time puts pressure on the availability of equipment for exports because import containers provide the supply of equipment for the export market.

Steak Is Back for Dinner

The U.S. consumer’s willingness to eat out is not hard to grasp, says Gregg Doud, National
Cattlemen’s Beef Association chief economist.

steak jan11Historically, nearly 50% of beef consumption has occurred outside of the home, with hotel and
restaurant demand a driver of overall beef demand, he says. This category has struggled since 2008 and is a key reason why wholesale prices for middle meats (steak) have struggled.

"This may be about to change," Doud predicts. In October, the National Restaurant Association’s
Restaurant Performance Index was pegged at its highest level since September 2007, with both sales and traffic levels improving. Optimism is high in this industry at the moment and this bodes well for beef demand in 2011, Doud adds.


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