ag-friendly marketplace, The

Northwestern Financial Review, Nov 22, 1997 by Allen, Randy

Demand-driven markets provide opportunity

Grain traders came back from the July 4 holiday with a headache, taking their pain out on the corn and soybean markets. Monday, following the holiday, we saw the market post contract lows for December corn futures at $2.27-1/2 and November bean futures at $5.77. Welcome back! Grain traders were worried about increased yield potential, due to near ideal growing conditions, and a demand picture that was less than bright.

Since mid-summer, the price structure for the grain markets has been steadily working its way higher as production estimates are softening, while export and domestic usage is strengthening. Yield potential seems to have been limited by dry weather across the Midwest in July and August, forcing supply numbers to drop, counteracting the favorable weather during the planting season. Demand is steadily rising as livestock production numbers grow, increasing feed demand, and export business firms, as global demand expands.

This increase in demand is most evident in the soybean complex, as we have recently set some all-time weekly highs in export inspections. These changes in the demand structure are tightening up the carryouts, causing the market bears to take notice.

An analysis of the USDA supply/demand numbers is in order to better understand the renewed upside potential in the grain markets. United States domestic feed usage for1995-1996 was 4.682 billion bushels. The USDA has increased 1996-1997 usage by 686 million bushels to 5.368 billion bushels. In the September USDA supply/demand report, the government estimated 1997-1998 usage at 5.550 billion bushels. In the span of 30 days, the USDA increased the estimate again to 5.625 billion bushels, partially due to larger than expected expansion in the livestock sector. It is obvious that continued expansion in the U.S. livestock sector is vital to a strong price structure in the domestic market.

The domestic totals for the food, seed and industrial category are not as impressive. 1995-1996 usage was 1.612 billion bushels and is expected to grow to 1.690 billion bushels, a slight increase due to the larger planted acreage. A key issue to this sector of demand is the debate currently raging over ethanol legislation, which if negatively altered in any way could impact this category the most.

The potential in the export markets is in the forefront of any demand conversation this year, as this category represents the greatest deviations in estimates. With domestic usage projected at 7.330 billion bushels for 1997-1998, the real support, or lack there of, for grain prices will depend heavily upon a continued aggressive export agenda. Currently, export estimates for 1997-1998 are expected to rise 13 percent to 2.025 billion bushels.

This would be a welcome increase from the 1996-1997 estimate of 1.790 billion bushels, and just below the 1995-96 level of 2.228 billion bushels. With foreign feed grain production down approximately 4 million tons this year, due in part to reduced output in China, Brazil and Canada, a potential increase in U.S. export business is feasible. Continued upward price movement, however, could hamper expanded sales to financially strapped countries, thus shrinking the current demand picture.

Soybean estimates on the other hand are up significantly over last year. Production for 1997-1998 is estimated to be a record 2.722 billion bushels, which while initially bearish, would not be enough if demand projections are realized. In light of a 59 million bushel increase in crush projections, a 78 million bushel increase in export projections, and an 8 million bushel increase in seed/other consumption, clearly demand is keeping pace with the larger production outlook.

In fact, as I write this, exports are on a pace that would greatly surpass the current 78 million bushel increase estimated by the USDA. Too many, myself included, think it will take higher prices to slow the rapid growth of soybean usage in the coming marketing year.

The soybean product markets also give us an expanded view of the bullishness emanating from the oilseed complex. Soybean oil production has increased steadily over the past three years. 1997-1998 projections peg oil production at 16.670 billion pounds, a 1.430 billion pound increase from 1995-1996. Putting this in perspective, demand has increased by 2.268 billion pounds over the same period, outpacing the growth in supply by 838 million pounds. Likewise, soybean meal production has grown from 32.527 million short tons in 1995-1996 to a projected 35.475 million short tons in 19971998, an increase of 2.948 million short tons. The growth in demand for that same time frame is 2.987 million short tons with the 19971998 projected usage at 35.600 million short tons (larger than the 19971998 production estimates).

What Does This Mean?

What do all of the above USDA estimates mean to the grower and his or her banker? To start with, it points out that as a general trend, the growth in production is simply not keeping pace with the growth in demand, obviously a positive situation for producers and their lenders. Global demand should continue rising due to economic expansion and the growing population which brings 200,000 new mouths into the world each day.