Getting the Scoop on Grains

 | Dec 08, 2011 | 4:00 PM EST
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The grain futures markets have for the past three months been absorbed by the developments playing out regarding the European Union (EU) sovereign debt crisis. The investor and trader fears of the EU crisis spreading into a worldwide debt contagion or another world economic recession developing have pushed prices for grain futures to multi-month lows. The technical/chart postures of the grain markets are also presently bearish.

Indeed, corn, soybean and wheat futures prices are down around 20% to 25% from their late-summer highs. Like traders and investors in many other markets, the grain traders presently have a myopic view that has honed in on the EU debt crisis. However, the supply and demand fundamentals in the grain markets, particularly for corn and soybeans, cannot be considered bearish and they do tilt significantly in favor of the bullish camps.

For corn, the U.S. 2011-12 stocks-to-use ratio is currently projected by the U.S. Department of Agriculture at 6.8%. This is the lowest ratio since 1995-96. Historically, this is also a very tight ratio. Typically, the stocks-to-use ratio for corn is in the teens or higher. For soybeans, the 2011-12 stocks-to-use ratio is currently 5.11%. This is also a historically tight ratio. For wheat, the 2011-12 stocks-to-use ratio is 38.86%, which is considered abundant.

From a macro-economic perspective, demand for U.S. grains has been strong in recent months and is not likely to recede. China is a commodity-consuming juggernaut whose population has grown more affluent; in the process, their consumption tastes have moved up the food chain. Increasing Chinese demand for meat has led to the world's largest nations to dramatically increase its imports of soybeans and corn. China's grain import needs will only increase in the coming years.

Aside from the specific supply-and-demand balance sheets in the grains still being bullish, the overly stimulative monetary policies of the major central banks of the world in recent months are another bullish underlying macro-economic factor for the grains and for the other raw commodity markets. Looser monetary policy raises the risk of problematic price inflation. Price inflation is the archenemy of paper assets like stocks and bonds and is the friend of hard assets like raw commodities.

The easy-money postures of the world's central banks, including the U.S. Federal Reserve, is also a bearish underlying factor for the U.S. dollar. The world's major grains are priced in U.S. dollars. Any further decline in the value of the U.S. currency would make foreign purchases of U.S. grains less expensive.

Finally, while the technical postures of the grain futures markets are presently bearish (price downtrends are in place on the daily and weekly charts), veteran commodity market watchers note the highly cyclical nature of the commodity markets -- also read  as "boom and bust" cycles. The recent bust cycle in the commodity markets is not at all a surprise when looking at the historical price charts. It only suggests that the boom lies just ahead.



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