12, 2008 -- For your information (FYI) the three most influential markets on the board in my view are, bonds, crude oil and corn. Each can have an enormous impact on related markets or the economy as a whole, under the right circumstances. Bonds are interest rates which impact the value of the dollar while slowing or accelerating the economy. Crude oil is energy and we all understand clearly the impact it can have on the consumer spending habits. And corn, which has always been a feed and food has now has become a fuel.
This week ended with crude oil and corn prices rising to new all time highs as values are moving in lock step. A year ago, a debate raged whether or not crude oil would rise to $100 a barrel. It ended today, at $126 a barrel with one widely follow firm forecasting $200 a barrel within a year. Corn prices, thanks to a USDA report show supplies falling to their lowest levels in 13 years, hit record levels, up 75 percent in a year. Adding fuel (no pun intended) to the fire under corn prices was the USDA announcing that the US bio fuel industry would consume one third of the nations corn crop this season, up 22 percent from a year ago with the total coming to four billion bushels. An analyst with Iowa Grain Company in Chicago said, "record high oil prices are pushing demand for alternative fuels. And in the US, alternative fuel means corn based ethanol. The situation is dangerously tight."
By describing the situation as "dangerously tight" the analyst is pointing out that ending supplies of corn for the 2008/09 growing season are historically low. According to the USDA, corn stocks are now pegged at 620 million bushels, half of a year ago and only slightly above pipeline supplies. If the USDA is correct, a yield loss of only one to two bushels an acre this growing season will push supplies below pipeline requirements. If so, prices will quickly embark on a demand rationing rally. A violent one, no doubt.
Adding to the bullish outlook for corn is the equally bullish situation facing soybean prices. The USDA shocked the trade when it lowered ending stocks of soybeans for the 2008/09 season. For the '07/ '08 season stocks were so tight that nearby futures came within five cents of $16 a bushel. And despite an estimated increase of 10 to 11 million acres for soybeans this year, the balance sheet remains at a historically tight level.
Thus, as we enter the growing season for corn and soybeans, supplies of both are razor thin when compared to any historic measure. That means Mother Nature holds the key to prices. Adverse conditions in July when the corn crop pollinates or August when the soybean crop flowers will lead to a yield loss. A yield loss for either crop that further lowers ending stocks and will take the lid on prices for corn and soybean as well as a host of other related commodity markets.
There is no way out of the current bind the world faces with grain and livestock prices. Global demand and in particular from Asia for food, fuel and feed will not run its course for years. Add to that bullish scenario problems brought on by Mother Nature and you have the makings of a gargantuan bull market for grain and livestock prices that has a long way to run. A long way.
The livestock complex was no shrinking violet this week. Distant month cattle and hog prices rose to all time historic highs, following the strength seen with corn and crude oil values. And finally, cattle prices "broke to the upside," literally taking the lid off the market as I have been forecasting for some time. The cattle market is finally coming into its own!
Fundamentally, beef production is peaking while demand perking up nicely. Generally, that sparks a rally by itself. But in the case of the cattle market, there is no quick fix for higher prices. Due to the breeding cycle for cattle it will be at least two more years before a rise in production will be seen. And here is the rub; a rise in beef (and pork production) somewhere, "down the road" is based on the loosey-goosey assumption that corn and other feed grain prices will not continue upward. If grain prices rise further, there is no guarantee that livestock producers will feel to urge to increase the size of their herds. That's the rub!
For your information (FYI) the grain markets are not likely to cool off anytime soon. The battle between those that want grains for food, feed and fuel is far from over.
Also, FYI; FYF (fill your freezer!) as soon as possible. The era of cheap meat is over. It's done. You can stick a fork in it. To reiterate: FYF and do it now!
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)