The Incredible Shrinking Margin

The U.S. and global balance sheets are tight in the major ag commodities with foreign coarse grain usage rising despite high prices and stocks declining. This chart of total foreign coarse grain consumption excludes imports/exports — this is net consumption. Within the total usage of coarse grains, foreign feed consumption has been rising steadily despite high prices and plentiful wheat supplies. Foreign feed usage will post a record high 534M metric tons this year, 63% of total foreign disappearance of coarse grains. The global soybean S&D is tight, but slightly more comfortable than for corn or coarse grains. Soybean futures, however, are relatively low compared to corn, at a price ratio of under 2:1.

The heat-ravaged U.S. corn crop is forcing US corn disappearance to decline by around 500 metric bushels, through both reduced exports and feed use, and our ending stocks/use ratio will still be the lowest since 1996. The pressure will be on to ensure acreage here and abroad in 2012 crop and to keep the brakes on demand growth. Low prices won’t do that.

Some will argue a global slide back into recession will reduce demand, but history doesn’t support that. This chart of foreign coarse grain consumption shows that despite the severe 2008 economic downturn, demand continued to rise. Consumers may change their menus, but they still eat, and animals are no different. The demand growth in China accounts for a large percentage of total foreign demand growth, which points to steadily rising imports of corn in the years ahead, as well as soybean imports, with the United States one of the few exporters of size. The only question may be the pace of China’s rising imports and their notoriously clever, but crafty, buying patterns may well add to futures market volatility.

Another factor to consider is the role of “Big Money” (speculative or investment capital) in U.S. commodity futures. Index funds were targeted in recent years as a major factor in rising prices and volatility, but perhaps surprisingly, data doesn’t support that. Index fund longs in corn and wheat have been relatively flat for nearly two years, with soybean longs peaking in early 2011. Some of the swings in Big Money net positions have come from the Managed Funds sector, where their positions can be net long or short. Managed funds can shift quickly, for fundamental, technical, or any other reason, fueled at times by volume from computer trading models. The changes in “Managed Funds” net positions since early 2010 have been dramatic and swift — especially in corn — which has been reflected in volatile, dynamic price swings. (One interesting aspect has been the shift from net-long to net-short in fund holdings in Chicago wheat, exchanging Chicago for modest longs in KC wheat.)

The combined impact of active speculative money in ag futures, along with tight S&Ds and rising global demand for coarse grains, wheat and soybeans, may be volatility and high prices that will be our companions more often than not for the next few years. Take steps to ensure that your business doesn’t fall prey to high costs and “The Incredible Shrinking Margin” syndrome.

Diana Klemme is a longtime contributor to Feed & Grain. Contact her at Grain Service Corporation, Atlanta, GA, by calling (800) 845-7103 or e-mail at diana@grainservice.com.