August 14^th, 2010

   USDA reported US and world supply and demand numbers on August 12^th. The report indicated that finally the supply and demand situation for the US farmers is taking a turn for the better. USDA indicated export demand for wheat, corn, and soybeans are all increasing to fill the shortfall that has been created by the Russian drought. This in turn has started to decrease the US and World carryout. The market place as whole has been caught by surprise and the markets are reflecting that. US ending stocks in wheat are still estimated at 952 million bushels and a carryout to use ratio of 39.9 percent and the world carryout to use ratio dropped from 29.8% to 26.3%.

   So the reality today is that there is still plenty of wheat and other grains to go around, but after 2007 & 2008 the buyers aren't going to wait as long to get themselves covered. Also we know that usually once crop sizes start shrinking it usually takes USDA more than one report to fully reflect the changes that are currently happening. Hence, the carryouts are likely to continue to shrink ,at least short term. I know in our world during mid July we had trouble finding anyone to even give us bids on our wheat as we loaded it, and now it's almost turned into a feeding frenzy. So the dynamics have dramatically changed and the basis levels have started improving rapidly as this trend develops.

   I have no idea what will happen price wise as we go forward. Just suffice it to say that increased volatility and price swings will be with us for awhile longer, and that there is a great deal of uncertainty until we know how the fall planting is going and what the southern hemisphere wheat prospects look like.

   Remember a market basically has a job to do. This markets job is to ration demand and attract supply. Since the market started its rally I'm sure that our fall planted acres will rise worldwide while at the same time demand rationing and product substitution is occurring. So until the supply and demand balance has been restored, our markets will continue to react in big ways.

    Corn is also being affected by the same set of circumstances. Because Russia historically sells a lot of cheap feed, wheat and barley in the world market, corn also has firmed up in price. Although the price moves haven't been as dramatic it will keep the markets well supported. That doesn't mean that with a monster fall harvest getting ready to commence we won't see some weakness, but it should limit the amount of decline if it occurs.  

Till next time,

Brent