Understanding North American Grain Markets

Corn, wheat, soybeans, and canola, amongst a swath of other grains, have experienced record price or planting levels. Corn in the US hit record-level sowings and this year’s canola crop in Canada will be the industry’s sixth consecutive record crop. These events can be explained, arguably, by two primary phenomena: weather and China.

Weather’s impact

Weather is always critical in understanding the fluctuations of grain markets, and a number of key events have been responsible for record planting in North American canola, soybean, corn, and wheat crops.

Flooding in Argentina and Brazil, spates of dry weather in Russia, Spain, and the US, and a frigid cold snap in wheat-producing regions in Western and Southeast Europe last winter have all reduced output in key grain-producing regions while also drumming up the need for increased North American planting and exports.

The impacts of weather are unlikely to return to normal after meteorological forecasters at the World Meteorological Organization predicted that the cause of these weather abnormalities, principally La Nina – an abnormal cooling of ocean temperatures in the Eastern and Central Pacific – will not continue in 2012, and that either normal or El Nino conditions – an abnormal warming of Pacific waters – are equally likely to prevail.

The resulting weather changes will likely carry grain market weather impacts in both the US and other potential exporting countries such as Africa, India, and South America.

China’s influence on grains

China has also swayed North American grain markets with massive buying not earlier predicted by forecasters or producers. This dynamic has its roots in a number of variables, but is more broadly linked to the country’s rising economic growth and concomitant increasing appetites.

Growth of higher-order grains for food has also been supplemented by the increased need for livestock feeds, as pork, chicken, and beef consumption has risen dramatically over the past five years. Chinese pork production, averaging about 50 million tonnes each year or about 55 percent of global production, is a particularly lucrative market for grain providers supplying China’s domestic production and has seen significant international buying on the part of China.

This week the US Department of Agriculture (USDA) announced that US exporters sold 900,000 tons of corn to China, including 660,000 tons previously reported as sold to unknown destinations, which will become an important staple in ramping up China’s pork production.

“China is becoming an increasingly important buyer of corn, mirroring the role that it plays in soybeans,” Michael Creed of National Australia Bank Ltd. told Bloomberg this week. “Any news on what China’s import program is like certainly does have a price impact.”

Thin corn supplies and increased international demand are indicative of the US grains market as a whole and are key explanations for the massive sowings of North American crops.

Can it last?

The scale of planting that has occurred over the past year has reached an unprecedented scale. As a result, many are starting to question whether there will be enough buyers come harvests.

“Every place that anybody across the Northern Hemisphere can plant a seed, it is going to be planted this year” said Chris Lehner, a commodity broker at Archer Financial Services in Kansas.

Jim Riley, a grain broker for the Linn Group in Chicago, told Bloomberg that “[w]ith a big crop on the horizon, we will need to see more buying from China.”

Export demand may also be overstated if domestic production returns in many of the countries that are current importers of US grains. Domestic grain production in China alone has also hit record levels, with 31.7 million tons produced last year, 3.3 million tons more than in the previous year.

Grain prices have also receded in recent weeks, with corn falling 7.6 percent after the USDA released a report showing that American farmers will harvest a record crop this year. Wheat has traded relatively flat this year, with Russian and Ukrainian markets offering large increases in production with lower total costs, and after seven weeks of lows, Canadian canola (rapeseed) prices have only begun to gain back positive momentum.

But despite suggestions of overheating in North American grain markets, AgriMoney gives two important reasons why grain bulls may prevail. The first is that crops have yet to be harvested and the second is that weather will not guarantee the fruition of recently planted grains.

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.