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“Though demand destruction is anticipated, we see minimal evidence of it happening, with the exception of corn exports.” Deutsche Bank noted. “Indeed, we are concerned that the recent fall in grain a..

04 Oct 2012

Commodity Online
With supply side estimates stabilizing and in some markets building, market focus in agri-commodities has shifted to demand destruction. In addition, improved weather in South America for planting, against the backdrop of the US harvest, as well as concerns over global growth, are providing further pressure on prices, Deutsche Bank said in a report.

While sentiment has turned more negative as the quarter comes to a close, let's go back to fundamentals. Supply and demand balances are tight, particularly in the soybean complex.

“Though demand destruction is anticipated, we see minimal evidence of it happening, with the exception of corn exports.” Deutsche Bank noted. “Indeed, we are concerned that the recent fall in grain and oilseed prices amid expectations of sizeable South American crops and large North American plantings next crop year, may prevent the necessary herd reduction in the livestock sector. This might particularly be the case in the better capitalized hog sector.”the Bank added.

Even with assumed demand rationalization, the Bank finds soybean meal stocks to be extremely tight. Should the livestock sector continue production at current levels, availability in the US, which has the biggest influence on CBOT values, will be scarce.

The theme in agriculture has changed from shrinking supplies to supply stabilization, or even supply build (on reports of better than expected yields as harvest progresses), as well as demand destruction. Nearby corn and wheat futures closed the quarter up 8% and 18%, respectively. Soybean futures closed the quarter up 4%.

Since the end of June and to their price peaks, corn has surged 23.6%, wheat 27.6% and soybeans 17%. Wheat has held up much better since this time and has fallen 4% since its peak. Corn has fallen 9% with soybean prices down 10% from their peak level. As a result since the end of last year wheat and soybeans have been the best performing parts of the agricultural complex compared with extreme weakness in coffee and cotton.

As harvest results come in, the market appears to be more comfortable with availability. Harvest-related pressure, particularly as farmers reportedly are actively selling corn owing to aflatoxin concerns (and a lack of carry in corn/inverted curve in soybeans), as well as improved planting weather in South America have weighed on futures and prompted liquidation into quarter end. However, lower than expected corn and wheat stocks in the US Quarterly Stocks report led to a strong reversal in price performance in the last day of the quarter.

“Our supply demand analysis points to tight conditions, particularly in the soybean complex. USDA assumes significant demand destruction in the livestock sector, but, we have seen very little sign of this as of yet.” Bank noted.

On the supply side, it appears that corn yields may still have some downside, though revisions are far much less than what was seen over the summer. Even so US corn harvest projections have suffered from a significant downgrade since the start of the summer following extreme drought. In soybeans, better than expected reports from the field during harvest show an upward bias to yields.

On acreage, using Farm Service Agency (FSA) data, the Bank derives an additional 0.8 million acres for corn, equating to planted acreage of 97.2 million acres vs. the USDA’s 96.4 in its September crop report.

Turning to soybeans, the same analysis points to an additional 1.05 million acres for a total of 77.2 million acres, above USDA’s September crop report planted acreage figure of 76.1 million acres.

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