The Grain News
Grain News: September 2010
- Category: Grain News
- Published on Monday, 25 October 2010 18:30
Corn Yields in Question as Harvest Begins, But Overall Crop Looks Good
Harvest is fully underway across the United States, with farmers in all major grain growing states working to bring in what looks like a large 2010 crop.
Despite the generally positive outlook by farmers, national corn yields may not live up to earlier expectations and may end up closer to the historical trend. That would lower over all corn supplies.
“The crop here in Nebraska looks very good,” said Alan Tiemann, a farmer from Seward, Nebraska. Tiemann began harvesting corn the week of September 20.
Nationally, though, some pockets of poor weather may have taken the top off yields. In a weekly market report, analyst Tim Hannagan of the firm PFGBEST said many market watchers are expecting the U.S Department of Agriculture to lower corn yield estimates again in October.
In September, USDA estimated corn yields at 10.9 tons per hectare (162.5 bushels per acre), which was down from 11.1 tons in its August estimate and about equal to last year’s yield. Two years ago, corn yields averaged 10.4 tons.
That would put U.S. corn production at 33.4 million tons (13.2 billion bushels) and give a total corn supply of 37.0 million tons (14.6 billion bushels) when including the stocks left from last year.
“Even if yields end up a bit lower, there will be large stocks of U.S. corn available. This should hold true even if we see an increase in corn exports,” Tiemann said.
USDA did increase its corn export estimate to 53.5 million tons (2,100 billion bushels) in September due to stronger global demand, which analysts attributed in part to Russia’s ban on wheat exports.
Corn exports last year were 50.3 million tons while two years ago 50.0 million tons of U.S. corn were exported.
Hannagan said he expected that those looking to buy U.S. grains may be aggressive as harvest progresses. That was the case last year, he said, when buyers looked to take advantage of weaker cash prices at harvest. Farmers tend to sell some of the crop right away, he said, but may keep the rest “locked up on the farm for higher prices next spring.”
He said off farm corn inventories – corn stored in commercial facilities – will drop while on-farm corn inventories grow the last quarter of this year and stay strong into the first half of next year.
While USDA expects some additional corn exports, it lowered U.S. feed use and tweaked other segments. The bottom line is USDA estimated that corn ending stocks would be 28.3 million tons (1.12 billion), which is only about 5,100 tons less than last year.
“If you look at the global picture, we have a good supply of feed grains, including U.S. corn,” Tiemann said.
He also noted that yields were expected to be softer in areas that began harvesting earlier because those were the areas with the worst weather.
As harvest progresses better yield numbers may help steady the overall average, Tiemann said.
Barley, sorghum updates
In its September update, USDA said U.S. sorghum yields would be 4.9 tons per hectare (72.7 bushels per acre). This is down a bit from its August estimate, but ahead of last year’s 4.7 tons per hectare.
If realized, that would put the U.S. sorghum crop at 9.55 million tons (376 million bushels), which is just a bit smaller than last year’s 9.72 million ton crop. USDA increased its estimate for sorghum exports due to good global demand.
As for the barley crop, USDA estimated yields at 3.89 tons per hectare (72.3 bushels per acre), which is the same as its estimate in August.
Such yields would put the crop at 5.1 million tons (184 million bushels), off from last year’s crop of 7.7 million tons (227 million bushels).
Levy Limiting Feed Grain Options for Livestock Producers
Disruptions and price distortions in global grain markets following Russia’s grain export ban in August have influenced global grain prices and for some feed grains buyers, alternatives face levies.
“When grain prices started to skyrocket, many grain and feed companies in the European Union were looking for alternatives in their feed sector,” said Cary Sifferath, director of the U.S. Grains Council’s office in Tunisia. “Irish feed millers, for example, approached the European Commission seeking relief with one option being the suspension of a levy on sorghum.”
This was not the first time the EU was asked to suspend the sorghum levy, but the idea this time drew the interest of the United Sorghum Checkoff Program in the United States, which thought the levy was not reflecting actual market prices.
Bill Kubecka, a sorghum producer from Palacios, Texas, and Sorghum Checkoff board director, said the Sorghum Checkoff sponsored a study with the U.S. Grains Council to determine how the European Union Levy Board calculated the sorghum import levy and whether it reflected actual U.S. sorghum export values.
The Grains Council report found that the levy rate was based off pricing data for U.S. barley shipped out of Duluth, Minnesota. “Barley is not generally sold through Duluth, which makes it difficult for the Levy Board to obtain solid numbers there,” said Sifferath. “That being the case, the values are likely based on prices used to determine U.S. commodity loan rates, but those prices are generally set below market values.”
Sifferath explained that barley and sorghum prices are not related anyway, so regardless of where the barley value came from, it made sorghum imports from any exporter into Europe difficult because the levy rate was set considerably higher than sorghum market values would warrant.
While the run-up in grain prices resulted in a lower levy – dropping from 31.76 euros per ton on May 1 to 7 euros on September 15 – the way the levy is calculated stretched out the rate of decline.
“The corn levy has been at 0 euros for some time and while sorghum trades at a premium to corn at times, the differential hasn’t matched the real market value,” Sifferath said.
The European Feed Manufacturers’ Association (FEFAC) and organization of grain traders, the Cereals Commerce Committee (Coceral), have also met with European levy officials over how the sorghum levy is calculated.
“While eliminating the levy altogether would be the ideal, if the levy is going to be in place we are hopeful that it will be set based on more accurate market values,” Sifferath said.
He said the Council’s report to the Sorghum Checkoff recommended that the levy be based on corn prices from the U.S. Gulf – since corn and sorghum prices are more closely related and corn prices from the Gulf are easy to obtain.
The report, which outlines that and other options, will be presented to the EU Levy Board, Kubecka said.
“We hope this will help lead to a permanent change in how the levy is calculated,” he said. “If the EU needs sorghum two months from now, two years from now or whenever, it will be helpful for European grain importers and feed manufacturers if the levy calculated more effectively.”
‘Free on Board’ Provides Options for Grain Importers
Buyers looking to have more control over their grain imports should consider adopting Free on Board (FOB) contracting instead of relying on a cost and freight (C&F) contract, according to the U.S. Grains Council.
Many importers who buy U.S. grains use C&F contracts but the Council has learned over time that FOB contracts provide many benefits for buyers – including additional shipping options that do not exist with a C&F contract, according to Alvaro Cordero, the Council’s manager for international operations.
With an FOB contract, buyers can control the type of shipping vessel or at least have input on the vessel type. Cordero said this may lower shipping costs, although that is not the intent of FOB even though experience says that is the case.
Buyers can also work with a seller to discover if the seller has additional quantities of the desired grain or an opportunity to ship a mixed load – to include different commodities on the same ship. “There may also be an opportunity to negotiate as the loading date gets closer because the seller may have new opportunities to present,” Cordero said.
“While there may end up not being any new opportunity, and perhaps shipping rates end up the same, without negotiating an FOB contract, a buyer would never see those opportunities. It would be completely out of the buyers control,” he said.
A few points
With a FOB contract, buyers can control a specific product and nominate to load the shipment at a specific port. Sellers don’t have an option to switch ports or obtain the grain from another location.
FOB contracts provide buyers additional options and more control when purchasing grain in global markets. Shown here is a ship being loaded with grain in the Port of Seattle. With a C&F contract, the seller commits to load a vessel of a specific grain – like U.S. No. 2 corn – and deliver it to the buyer’s port of choice. Beyond that, the buyer does not have much control, Cordero explained, including the source of that corn.
In other words, he said, the corn could come from the United States, Argentina, South Africa or wherever, provided it was U.S. No. 2 quality as the contract specified.
“With a C&F contract, the seller provides both the grain and transportation,” Cordero said. “While this simplifies things, it takes away options and can sometimes lead to disagreements.”
For example, a buyer may want to buy U.S. No. 2 sorghum and would assume it would be tannin-free sorghum from the United States. With a C&F contract, however, the seller can source that sorghum anywhere in the world, including a region where tannin is an issue in sorghum.
“In this case, the buyer didn’t have any control and in the end the company couldn’t use that sorghum in poultry feed, which created problems,” Cordero said.
Buyers in Costa Rica used to do strickly C&F contracting but found the number of sellers continued to decline. To increase buying options and to find alternative resources, the country switched to FOB. The result was increased competition among potential suppliers. Cordero said Costa Rica transitioned to 100 percent FOB trading in 2007 and has seen much success. The Council has even used Costa Rica as an example when hosting a conference on FOB for grain buyers from Morocco, Alteria, Tunisia and Saudia Arabia.
More rewards, more risk
Cordero said while there are many oppportunities to come out ahead with FOB contracting, organizations considering making the switch should do so carefully. “There is more risk with FOB – there are more things on the table,” he said. “Assistance is available, though, from experts who know about risk management and freight. Over time, as skills develop, buyers can take over that role should they choose.”
There are also courses available for buyers to learn about FOB contracts in great detail. Cordero said buyers who are interested in FOB contracts can contact the Council for more information.