The US Department of Agriculture (USDA) published their agricultural supply and demand report last week and caught many market participants flat-footed. The rather bearish outlook for major grains was led by a significantly higher-than-expected supply of corn and soybeans.

The recent weather conditions haven’t been a big help for the bulls in the market as South America got quite a bit of rain lately (promising a trend yield) while at the same time Ukraine and China are expanding their production. Additionally, due to the price discount of wheat over corn, many farmers allocate more land towards corn production in the U.S. adding to what seems to become a record year in global corn output in 2012. Of course this assumption is based on reaching U.S. harvest season in fall without any losses due to major dry periods.
 
On the demand side we see further pressure on prices for corn as animal feed since buyers decide to substitute their consumptions with feed-grade wheat and soybeans due to continued oversupplies in those markets. Prices for wheat have become competitive relative to corn and should continue to capture market shares. The uncertain macro-economic outlook for this coming year translates into potentially weaker growth numbers for the global economy, reduced risk appetite in financial markets as well as a further strengthening of the US dollar (especially in view of the on-going crisis in the euro-zone). The sum of these factors thus implies a rather negative outlook for the food commodity markets. In our opinion there will be further corrections in the grains prices and especially corn will be under pressure in 2012.
 

- Record supply of corn

All signs currently point towards the fact that 2012 will be a record year for global corn production. China and the Ukraine are stepping up their production and the U.S. is allocating more land towards corn all the while expected losses in South America are likely to turn out much smaller than anticipated. As a result, the USDA predicts an increase this year by 5% to a record of 868 million tonnes. We believe it could be even more than that.


- Weak macro-economic outlook

The weak macro-economic outlook doesn’t quite help the bulls in the food commodity markets. Historically commodity prices stay low when prospects for global growth appear to be as weak as they are now. Given the fact that price levels for food commodities have remained relatively high up until now, we see a lot of room for corrections over the coming months. Once market participants start focusing on fundamentals, they should see that supply outruns demand. In corn futures we were able to see first corrections already as prices fell by 50 cents to just over 600 cents per bushel after USDA published its report last week.


- Rationalization in the food commodity markets

The sharp fall of corn prices lately was just the beginning of a larger correction taking place during the course of this year. We expect to see prices potentially fall even further to a level as low as 450 cents per bushel.  
 

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