The USDA’s first official estimate of the 2009/10 U.S. corn balance sheet provided a fundamentally supportive backdrop for the corn market. Modest price strength was seen in the week after the USDA reflected new crop ending stocks at 1.145 billion bushels compared to its 2008/09 ending stocks estimate of 1.600 billion bushels in the May supply/demand report. Starting with ending stocks near historically tight levels may create heightened anxiety heading into the summer growing season. The exceptionally delayed planting in the eastern Corn Belt this spring added to early concerns as the acreage debate accelerated with less than 10% of the Illinois and Indiana crops planted by first week of May.
Price action in the coming months is going to be heavily dictated by weather and acreage developments. The USDA will provide an updated corn and soybean planted area estimate on June 30, while the weather market will already be in full swing by then. The market will feel there is very little breathing room for any shortfall in production with ending stocks already estimated at historically low levels. The state of the ethanol industry during the 2009/10 marketing year could have notable implications on the final view of the balance sheet as USDA again predicts corn for ethanol usage being largest growth area for demand.
You may recall that last month’s write-up referenced the fact that natural gas futures had yet to get caught up in the optimism that the U.S. economy was making a recovery, which was noticeable in equities and outside markets. As of this writing, crude has made significant strives to break through resistance trading through and up to /bbl, and the S&P 500 has rallied +30%. Of all the commodities within the energy complex, natural gas has been probably the most impressive given its overall bearish S&D fundamentals. After making its lows at .1550, the nearby futures have rallied 45%, .42 per mmbtu. The recent rally in natural gas futures has come despite stocks comfortably situated at 33% above last year and 22% above the 5-year average. Also, t he EIA has released its Short-Term Energy Outlook Report projecting Industrial NG consumption to decrease by 8%, which translates to a 1.9% decrease in total annual consumption in 2009. However, production is expected to decline by 1% in 2009 and by 2.8% in 2010 as a result of poor economic conditions and lower natural gas prices. Total working natural gas rigs have declined by 54% since last August. The EIA makes sure to address the fact that the production shut-ins will begin to push the market higher as the economy is anticipated to recover. Thus there are several reasons why natural gas has made its recent move, optimism of a recovering economy, technical buying, and a rebalancing of the S&D table with declining production looking to offset bulging stocks.
The energy markets have been closely tied to the optimism in the equity markets for a recovery in the economy. The better the stock market performs, the better crude oil has performed – and this is despite overwhelmingly bearish fundamentals. Crude oil inventories are at the highest levels since 1990 with total oil demand at the lowest level since 1999. We now have crude oil inventories roughly 46 million barrels above the 5-year average with an additional 100 million barrels estimated to held on vessels floating in the ocean. If we had a 5 million barrel decline in inventories each week it would take 29 weeks to wipe out this excess inventory. We are currently seeing ongoing builds in inventory and do not expect to see declining inventories anytime soon on a regular basis. To add to the fundamental story, Saudi Arabia recently announced that they are on pace to expand their production capacity by the end of June to 12.5 million barrels per day. Spare capacity already sits at a comfortable 4 million barrels per day, a stark contrast to last year when we had little to no spare capacity. There was also an announcement that a major oil field with capacity of 4.2 billion barrels was discovered in northern Iraq. Despite these fundamentally negative developments, we still saw crude oil surge towards per barrel in early May as traders look for investment opportunities to capitalize on a recovering economy or on a run up in inflation. Last year’s rally had nobody willing to step in and sell the market due to the bullish fundamentals; this year I expect that the bearish fundamentals will give traders more confidence to sell the rallies and help to cap prices at more reasonable levels and even allow for sizable corrections in price from time to time.
DDGS values have gained momentum to the upside since the last update. Seasonal trends would indicate a decrease in values relative to corn; however, a sharp run up in protein feed ingredient prices has led many end users in displacing more of their protein requirements with DDGS and thus has raised DDGS values relative to corn. As DDGS becomes more of a staple ingredient in diets other than ruminant animals, DDGS prices will be supported as ruminants tend to be more seasonal in feed consumption than other livestock. The export markets have also supported higher DDGS prices as buyers around the globe are finding it difficult to source proteins from drought stricken countries in South America and are buying DDGS from the U.S. to replace the shortage. Buyers and sellers remain in a 30- to 45-day trading range as both sides are unsure about the state of the economy. The 30-day outlook for DDGS values is to see prices firming up relative to corn and more expensive proteins.