January 24, 2014
Smart corn traders, import diversification and price ratio question
China corn purchases make a new market bottom but soy's oversupply exerts downward pressure via the soy/corn price ratio.
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
After making a dramatic 5% single day jump, the last few days has seen corn get stopped in its tracks, essentially treading water in the US$4.20/bushel to US$4.30/bushel range. While corn's fundamentals have firmed up via the higher consumption and lower inventories cited in January's WASDE report, three other factors have cropped up, two of which are having a restraining impact on corn's price.
China imports, poor Argentine, sahfrinha crops make a market bottom
First, corn's taking over from soy as the more bullish of the two major feed crops was confirmed by its own fundamentals as well as those of soy. Despite China's rejecting over half a million tonnes of US corn due to GMO contamination, it imported 820,968 tonnes of corn in December, which is a new record volume. This follows 800,000 tonnes of corn imports in November.
In all, China exceeded the USDA's 2.7 million tonne forecast, importing 3.3 million tonnes of corn in 2013. With the country's corn demand rising rapidly, it is projected to import 7 million tonnes in 2013, which will break 2011's record of 5.2 million tonnes. But even as its rising import volumes give bullish support to the world corn market, China is teaching everyone else how to play the importing game.
From the start of the second quarter to November, corn's price kept falling and China purchased almost no corn. At that time, corn's fundamentals were worse than soy's and China stayed out of the market. Instead, it imported 1.65 million tonnes or over half its 2013 corn import volume in November and December, after prices had fallen to below US$4.30/bushel, nearly 50% from its first quarter highs.
No sooner did those huge shipment volumes come than January's WASDE report confirmed that the corn market had bottomed out and prices could not fall any lower. In that sense, China's reputation for having grain traders who call market bottoms with their mass purchases appears to be intact.
In fact, China's late year import binge also coincided with exceptionally dry Argentine weather in December and early January. While a new round of rains are due late this month can easily revive Argentina's soy yields, the late year heat and drought coincided with the corn crop's pollination –which means that Argentina may miss its corn crop harvest and export targets for about the fourth time in five years.
Along with a reduced Brazilian sahfrinha crop planting acreage (due to low corn prices), Argentina's drought implies that world corn supplies will tighten up -and prices firm up -from the second quarter onwards.
Import diversification vs. stronger financial fundamentals
Moreover, with a second January cold snap in three weeks threatening a US winter wheat crop with insufficient snow cover (required for thermal protection), even wheat fundamentals are improving, particularly as MENA countries like Algeria and Egypt step up the pace of their purchases. That in turn removes another source of deflationary pressure from corn's market equation.On the demand side, with record US cattle prices above US$140/hundredweight supporting an inventory rebound in the most feed-hungry of American protein lines, the question is why corn and wheat have not been stronger.
On the trading floor itself, a case for a corn bottom can be made in the relative market trading positions of soy versus corn and wheat. Mike Mawdsley, broker with trading firm Market 1 explains that large institutional traders were simultaneously holding long soy and short wheat and corn positions. This makes soy's deflationary fundamentals bullish for feed grains, "as this giant intra-commodity spread continues to keep these markets at a strong inverse correlation."
But while institutional investor's relative grain and oilseed trading positions are positive for the former, ground level market actions by end-users has prevented corn from enjoying market stimulation from this state of affairs. For both corn and soy, the largest end-user country of all, China, has been keeping prices in check via supply diversification. -Import diversification away from US corn and soy almost always deflates the prices of these feed crops and this year is no exception.
The oilseed market was deflated by reports that China had cancelled three Panamax cargoes (totalling 171.6 thousand tonnes) of American soya beans and substituted three lower cost Brazilian shipments in their place. Calling early crop reports from major Brazilian growing provinces "impressive" and "much higher than expected", Benson Quinn commodities revised its Brazilian February soy export forecast from 2 million tonnes to the 2.5 to 3 million tonne range, with much of the increase coming at the expense of cancelled US orders.
Along with the 16% year-on-year drop in the real's value versus the US dollar, China's ramping up of Brazilian soy imports is motivated by Brazil's falling first quarter corn export shipment volumes, which will be up to 67% lower than they were a year ago. That greatly eases congestion at the country's overcrowded ports, making far more likely that unlike in 2013, this year will see Brazil fulfil nearly all its soy export obligations.
All things being equal, with significantly more soy but less corn coming out of South America should deflate oilseeds while providing market support to the golden grain. But corn has two types of trouble holding it down.
Ukraine: China's corn supplier of choice?
First, while China boosted corn demand through its late year corn buying binge, it also deflated price expectations by relying less on American corn. China Customs reports that from 2010 when China became a net importer through the end of 2012, China sourced 96% to 98% of its imported corn from the United States.
But in 2013, China signed corn import liberalisation accords with Argentina, Ukraine and Brazil,while increasing its import of corn from Myanmar and Laos. All these nations have much cheaper corn than the US and allow it to step up import volumes with a minimal impact on world prices. As a result the proportion of corn imported from the United States in 2013 fell to 91%, with just 78% of December's record corn import volume being of US origin.
Out of the above mentioned nations, Myanmar and Laos are expected to be minor sporadic sources, as their own rising feed demand and limited land area limits their export potential to well below a million tonnes.
But while Brazil, Ukraine and Argentina have comparable supplies available for export, out of the three, Ukrainian corn is not just the cheapest but due to the country's location between Europe and Asia, enjoys the lowest transport costs. Which is why China imported more corn from Ukraine than any other country after the United States.
Hence, it is not surprising that China recently signed an agreement whereby China would lend Ukraine US$3 billion in return for imports of up to 3 million tonnes of corn annually.
While China is definitely making long-term corn import sourcing plans, the medium term impact has been the following: Import diversification away from America is hurting the price of both CBOT corn and soy at this time.
Ratio driven market resolution
But with soy's fundamentals more bountiful (and more deflationary), the result has been to keep corn prices flat and make soy deflate by around 8% over the last month.
However, there is one more factor to consider in this picture. Today, as it has been for the better part of more than half a year, the soy/corn ratio stands above 3.0. With corn becoming scarce relative to soy, it needs to fall to 2.5 or lower to make US and Ukranian farmers plant enough corn in the upcoming northern hemisphere summer.
The implication is clear: Either corn stays roughly constant in price and CBOT soy falls more, or corn rises while CBOT soy bottoms out. The news coming out of Latin America will drive the market to one of these outcomes over the coming weeks.
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