By Jon A. Nones
19 Dec 2007 at 06:16 PM GMT-05:00
St. LOUIS (ResourceInvestor.com) -- The grains complex has had a stellar year, outperforming energies, precious metals and base metals in 2007. Although corn has gained just 16% this year, soybeans are up 56% while wheat is 95% higher! Only time will tell if the long-term supply / demand fundamentals of agriculture will remain strong throughout 2008, but analyst say bullish factors still remain.
“Metals, oil and gold are dependent on the outlook for economic growth and also the financial markets. On the other hand, the factors which have caused grains to rise spectacularly this year still remain,” said Nik Bienkowski, CFA, director of marketing and research at ETF Securities, in speaking to RI.
In its “Commodities Review 2007, ETF Securities notes that its broad grains indexes are up over 40% on average due to global warming, extreme weather and demand for ethanol. In comparison, the company’s petroleum indexes are up over 30% and precious metals indexes are up about 20% this year.
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The DJ-AIG Grains Index [LSE:AIGG] and the DJ-AIG Grains 3 Month Forward Index [LSE:GRAF] increased by 36% and 48.8% respectively over the past twelve months.
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DJ-AIG Petroleum Index [LSE:AIGO] and the DJ-AIG Petroleum 3 Month Forward Index [LSE:FPET] were up 32% and 35%.
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The DJ-AIG Precious Metals Index [LSE:AIGP] and the ETFS Physical PM Basket [LSE:PHPM] were both up by 17% and 21%.
Looking at specific prices, gold has increased by 26% over the past 12 months, while silver is up only 7%. Likewise, platinum has gained 28%, while sister metal palladium is up just 6%. Crude prices have gained 48% and uranium prices are up 25%. Among base metals, lead is the big winner with a 50% gain; then tin at 45%, cobalt 40% and molybdenum 30%, while other industrial metals are down.
Gains in wheat, soybeans and, to a lesser extent, corn this year have been driven by demand from ethanol fuel, Chinese demand and imports especially for soybeans, low inventories that continue to fall, falling land availability, decreasing returns from yield enhancements, a growing population and the effects of extreme weather patterns such as flood, drought and frost, according to ETF Securities.
Wheat
The DJ-AIG Wheat Index [LSE:WEAT] increased by 56% over the past 12 months due to droughts, floods and low inventories. Wheat prices have soared to all-time highs, touching $9.80 per bushel this month, amid record low inventories and a series of weather-related supply disruptions in different areas of the globe.
Australia, previously the world’s second largest exporting country in 2005, had its harvest forecast reduced for the second consecutive year due to severe droughts, down from 25 million tonnes in 2005 to 10 million tonnes in 2006 and 13 million tonnes in 2007. At 18% of annual demand in 2008, global wheat inventories are expected to be at their lowest level in more than 40 years.
Earlier this month, the USDA lowered its estimate for 2007-08 U.S. ending stocks by 32 million bushels to 280 million bushels, a 10% drop, which would be the lowest level in 60 years. Inventories in storage will fall 32% from a year ago to 8.49 million tonnes by May 31.
Meanwhile, demand from India, the world's second-biggest consumer of the grain behind China, has risen substantially amid slumping global inventories. India had about 9 million tonnes in storage on Nov. 23, enough to meet domestic demand for nine months. The government said in October it wants to buy 1 million tonnes more in case of emergencies.
Matthew Sena, CFA at Castlestone Management LLC, told RI that demand for wheat has stayed strong in spite of high prices and should continue to grow at a moderate pace. But he said that high prices will spur increased planted acreage and this should ease the supply crunch, barring continued poor production.
“For 2008, I expect both soybeans and corn to outperform and for wheat to underperform,” he said.
Soybeans
The DJ-AIG Soybean Index [LSE:SOYB] and the DJAIG Soybean Oil Index [LSE:SOYO] increased by 53% and 48% respectively over the past 12 months due decreasing crop acreage and robust Chinese demand growth. Soybean and soybean oil prices are hitting all-time highs, approaching $11.60 per bushel and 50 cents per pound, respectively.
According to ETF Securities, the sharp decline in soybean acreage this year was a direct consequence of crop rotation from soybeans to corn, which is also expected to result in a sharp drawdown in U.S. and world inventories. This was further compounded by supply disruptions in wheat, which motivated feed substitution towards corn and soybeans.
On the demand side, Chinese demand has risen steadily since 1995 when the country turned into a net importer of soybeans. China’s share of world imports has increased rapidly to 45%. According to analysts, China's soybean imports may grow by 9.6% on an annual basis this year to 31 million tonnes and increase to 45 million tonnes by 2012.
Sena said soybeans lost acreage last year despite increased demand, and demand should continue to grow in China and other developing nations.
“As per-capital income increases in developing nations, people are consuming higher protein diets; the production of greater amounts of meat requires feed in the form of corn and soy meal,” he said. “More corn used for ethanol will likely translate into increased need for soy meal as livestock feed.”
Strength in soybean and soybean oil prices has also been associated with rapidly increasing demand from bio-diesel production facilities due to higher crude prices, currently close to $90 per barrel. Presently, the U.S. has 53 biodiesel plants operating, with 38 more under construction and 22 additional plants being planned.
According to the DOA Farm Service Agency, one bushel of soybeans yields approximately 1.4 gallons of bio-diesel. Soybeans contain about 20% oil, so it takes almost 7.3 pounds of soybean oil to produce a gallon of bio-diesel.
Corn
The DJ-AIG Corn Index [LSE:CORN] fell by 4% over the past 12 months due to record production. U.S. corn acreage increased 18.5% this year from 78.3 to 92.9 million acres - a level not seen since 1944.
But corn prices surged in 2006 by more than 360%, driven by rapidly increasing demand from ethanol-producing facilities. Prices only stabilized in 2007 after more acreage was allotted to corn by farmers to take advantage of high prices.
“The same increase in acreage, however, is impossible to repeat in the short term, and in fact corn is likely to lose acreage to both wheat and soybeans,” said Sena.
Despite the massive crop rotation towards corn acreage this year, the U.S. is expected to achieve only a modest surplus, and the world market is expected to remain in deficit. The market is predicting 88.9 million acres as compared to 93.6 million acres in 2007. World inventories for 2008 are forecast at 14% of global demand, their lowest level in more than 30 years.
There are also indications that China, the world’s fourth largest corn exporter in 2006, could soon become a net importer of corn for the first time in more than a decade. In 2005-2006, the country harvested 139.37 million tonnes of corn. The domestic corn market was balanced roughly with consumption totalling 137.4 million tonnes and the export of 3.79 million tonnes.
Furthermore, China announced plans this week to cancel the current 13% export tax rebate on corn on Dec. 20 this year. The new grain export policy is aimed at restraining China's grain exports and ensuring domestic supply in order to cool prices. China also suspended approvals for corn-based ethanol projects in an attempt to keep food price inflation under control.
On the other side of the world, President Bush earlier today signed into law the “Energy Independence and Security Act,” which includes a historic Renewable Fuels Standard (RFS) calling for at least 36 billion gallons of ethanol to be used nationwide by 2022. It calls for 15 billion gallons per year of corn-based ethanol and another 21 billion gallons from “advanced bio-fuels” that use materials other than food crops.
“The recent farm and energy legislation is protective of the American farmer and mandates increases in corn-ethanol use over the next decade plus,” Sena confirmed.
Ethanol fuel is consuming 20% of last year's corn crop and is expected to gobble up more than 25% of this year's crop. This is up drastically from 5% in 2004 and 6% in 2005. U.S. ending stocks to usage ratio for the 2006/2007 crop year is pegged at 10.2%, the 4th lowest on record.
U.S. ethanol production is up almost 30% over last year with new production facilities coming online regularly. There are over 100 ethanol plants in operation at present in the U.S., but 40 more are in the making. Right now, there are 900 gas stations selling 85% ethanol (E85).
Darin Newsom, DTN senior analyst, said demand was expected to grow even before the signing of the Energy Bill, with 2.115 billion bushels projected to be used in 2007-2008 for ethanol and 3.2 billion bushels in 2008-2009.
He said the corn market is poised to begin its third leg of the long-term uptrend that began in late 2005 when the front-month contract was trading near $1.86. The second leg ran from $2.64 1/4 to $4.37 1/4. He predicts the third leg will push prices to between $6.10 and $6.50, most likely occurring in the last quarter of 2008.
“The corn market does indeed look like it will make the next big move - as far as grain markets are concerned,” concluded Newsom.
March corn rose 2.75 cents to settle at $4.3475 a bushel today on the Chicago Board of Trade, while March wheat advanced 21.5 cents to $9.7350 a bushel and January soybeans climbed 9.25 cents to close at $11.59 a bushel.
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