Corn market: change of trend of correction?

Market Leader informed

In the light of the critical situation at the food market, onJan 26^th the Food and Agriculture Organization of the United Nations (FAO) urged the countries of the world to study the consequences of the high prices on food and to abstain from any strategic actions, which may seem helpful in the short run but may worsen the situation in longer-term perspective.

On Feb 18^th at the G20 summit the Argentinean Minister of Economy reminded that the price at the market of crops (like any other market) is based on the supply-and-demand ratio. According to him, any intervention may cause some imbalance. Argentina is among the top 3 exporters of corn in the world and the uptrend is beneficial for the country’s economy even though the agricultural sector makes up only 6% of the national GDP, especially now, when the Buenos Aires Corn Exchange reports that the current crop yield is lower than expected because of the dry weather. The forecast for the crop yield remains unchanged at the level of 19.5M tons (in 2009 it was 22.15M tons).

 

 

 

On Feb 16th the price made a rebound from the support level of the wave (the peal is 597.25). On Tuesday, Feb 22^nd, the market was closed at 690,25 (-7,26%) against the background of the military actions in some African countries. On Wednesday it formed a local low at 667,5, which was probably caused by the decision made by the Chinese central bank to raise the reserve requirement ratio in order to curb the inflation processes at the domestic market of agricultural products. It is expected to damp down the demand for corn in China.

 

 

 

Experts from the Department of Commodity Trading of Masterforex-V Academy assume that the main factors that may influence the price of corn in 2011 are the following:

·         Despite the mentioned announcement of the Minister of Economy, on Feb 22nd the Argentinean cabinet of ministers decided to increase the export of corn by 5M tons in the 2010/2011 marketing year. The planned net export volume for the year makes up 12M tons (for comparison sake, 8,85M tons in 2008/9 and 7,4M tons in 2009/10). Argentina traditionally exports corn to Iran, Algeria, Columbia, Egypt and Peru. This year it plans to add China on the list.

·         According to the forecasts for the 2011/12 marketing year, China is expected to boost its import of corn up to 9M tons (in 2010/11 it was 1.3M tons) because of the growing consumption and serious droughts seen over the last 2 years. However, in short-term perspective the steps made by the People’s Bank of China should also be taken into account.

·         Military actions going on in some African countries lead to a decline in the demand for corn in the region. (Egypt is on the list of the world’s top 5 importers of corn). However, the situation needs constant monitoring because the continuous lack of food will probably be rapidly compensated after the situation stabilizes.

·         The situation in Africa also affects the pace of the global economic recovery as it may harm the oil and gas production industry and the transportation of the energy carriers to Europe and the US. The slowdown in the economic growth will reduce the demand for corn.

·         On Friday, Feb 18^th, the USDA reported about the export of 156 100 tons of corn to Mexico. This year Mexico is expected to show the increased demand for corn as the recent frosts have destroyed 16% of the expected harvest.

·         On Feb 12^th the Global Alternative Energy Alliance (GAEA) published its annual report about the production of ethanol. Despite the fact that the production of ethanol has declined over the last 3 weeks, according to the forecast for 2011 the production volume is expected to grow by 3%. In 2011 the US is planning to produce 51 billion liters of ethanol. It should also be noted that more expensive oil will inevitably lead to an increase in the prices on oil products and will increase the demand for bio-ethanol as an alternative fuel. 

·         A more detailed overview of ethanol production will be given in a separate article as it has a significant impact on the demand for corn around the world.

 

·         High prices made Japan reconsider the possibility of substituting 1M tons of corn for wheat and rice. It should be noted that every year Japan imports about 16M tons of corn. 95% of the volume is delivered from the US, where the reserve volume is nearing its 15-year low. Against the background of the global import (83.5M tons in 2010) these actions may only have a short-term impact on the price.

·         Taking into account the high prices on corn, farmers at least will retain such vast cultivation areas in the next season. However, the US and Mexico are planning to expand the cultivation areas in the light of the growing demand around the world, which may press the prices in long-term perspective. Numerous experts from the Department of Commodity Trading keep monitoring the situation.

The experts of the department consider a possible correction of the corn price at the global market after they have analyzed the global data on the trade and reserves of corn, as well as the steps taken by various governments and investment funds.

The abovementioned factors are expected to press the price, which in its turn will force the investment funds working with the agricultural sector to take profit. It will make the price decline further as in short term perspective the supply will exceed the demand. The same scenario holds true for those countries that restrain the export of corn while waiting for further growth in order to sell the product at a better price.

However it is too early to consider any change of trend as the price is still affected by such factors as the unfavorable weather conditions in some exporting countries, the extremely low reserves (lowest in 15 years) in the US and the stable demand for corn shown by the ethanol industry.

 

 

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