Despite the USDA’s estimate of 2009 U.S. corn acreage of 85.0 million acres being higher than expected and much higher than many of the market “fears” expressed ahead of the report at the end of March, corn prices held impressively steady during the first half of April. On the other hand, the USDA’s lower than expected soybean acreage estimate prompted a notable realignment of the relationship between soybean and corn prices in early April. The November 2009 soybeans/December 2009 corn price ratio jumped from 2.01 at the end of March to 2.25 by mid-April as the market signaled the desire to adjust acreage levels this spring to bring more acres into soybeans than the USDA’s 76.0 million acre preliminary estimate.
The market’s focus over the coming weeks and months will be increasingly on weather prospects as they relate to getting this year’s crop planted. After last year’s excessive rains and flooding problems, we are unlikely to face a similar situation again this spring, but the cool, wet start to the spring planting season across parts of the eastern Corn Belt and mid-South has raised a few warning flags. Without a notable improvement in demand prospects for corn, any planting issues may only have a temporary impact on market prices, but could prove to be a near term influence, nonetheless. The overriding situation in corn clearly remains the poor demand environment in the ethanol and feed industries, which should keep an overall defensive atmosphere in the corn market barring a major weather problem this spring.
As the spring passes by and the summer approaches, normally DDGS values would see a steady decline in values relative to corn prices. This cycle, however, has not occurred this year. Tight supplies from idled and reduced ethanol production have forced buyers to often pay asking prices from sellers. Buyers and sellers have remained in a buying and selling window of 30-60 days. Export markets were more active in the first quarter of 2009 than were the last quarter of 2008; however, container availability has been more difficult to come by as fewer goods have been imported to the U.S. This has led to more DDGS being shipped export via bulk vessels. The 30- to 60-day outlook for DDGS prices should see values remain steady compared to corn, with downward pressure on prices as we get into the hot summer months.
Of all the energy commodities, natural gas continues to be one of the few that has focused and traded recently more on supply/demand fundamentals. Natural gas has for the most part yet to get caught up in the optimism that the U.S. economy is making a turn for the better. Current and forecasted S&D fundamentals continue to be the market driver for natural gas. On the supply side, stocks are situated at more than adequate levels as the country emerges out of winter. As of this writing stocks were at 1,674 Bcf, 440 Bcf or 35.7% over last year and 309 Bcf or 22.7% above the 5-year average. While production levels remains firm, still up 2.23 Bcf/d on the year, there have been continued curtailments in natural gas rigs. North American rig counts have declined nearly 50% from more than 1,600 rigs operating last August to now below 800 according to Baker Hughes. Demand, most importantly industrial demand, continues to wane and the EIA last projected industrial demand to fall 7.4% for 2009. With the currently known stocks surplus and projected demand, one would anticipate prices to be quite lackluster this coming summer. With that all being said, the rebalancing and production cuts taking place due to poor margins, the unknowns of upcoming summer heat and hurricane season, the talk of a bottoming economy, NYMEX prices versus historical price distributions are attractive. As of this writing, the NYMEX Summer Strip is at .00. Using the Price Distribution Chart below we see that since 2001, the NYMEX forward Summer Strip has only spent 20% of the time below .00.
The energy markets have been greatly influenced by the direction of the equity and monetary markets. The health of the economy is having a direct impact on the strength to crude oil and gasoline prices. Crude oil has been much firmer in recent weeks/months as we have moved solidly away from the low area that we continually threatened from December through February. Prices have moved up into the area, largely on ideas that an eventual recovery in oil demand will occur as we begin to work out of the recession. Price rallies at this juncture are deemed more inflationary/investment related than anything fundamental. Oil supplies remain over 30 million barrels above last year’s levels in the U.S. We continue to see solid imports and low refinery operation which is helping to keep oil supplies well stocked. Gasoline demand has closed the gap with last year’s levels thanks largely to the lower pump prices that we have seen. With surplus oil in the market it would not take much to improve the margins for refiners enough to encourage additional gasoline production to fill our summer needs. Unlike last summer when supplies were tight and spare capacity was limited, this year we should have no trouble meeting our summer driving demands. It is widely expected that gasoline values may peak in the .25 area at the pump during the summer. That’s good for encouraging demand growth, but trying to offset the effect of having over 5 million Americans unemployed, almost double that of last summer, will be a difficult challenge. OPEC production cuts are expected to eventually start to have a real impact on tightening supply, but possibly not until we see a solid recovery in demand which could be much later in the year or even into 2010. That may not keep investment flows from moving into crude oil, but due to the weakness in demand and surplus supplies it should keep rally attempts largely in check.