February 14, 2018
China, ASEAN and India: Can we see the next feed crop rally from here?
Don't let Argentina's drought and short-term liquidity-based fluctuations distract you: Forces that will power the next decade's feed market upturn are quietly building up.
By Eric J. Brooks
An eFeedLink Hot Topic
While there is no shortage of corn or soy at this time, the market forces which will power feed crop rallies well into the 2020s are already visible.
Drought helps soy through its market bottom…
Before the USDA's report February 2018 report came out, soybeans began rallying amid mounting concerns about Argentina's arid, La Nina-induced drought, peaking at US$9.98/bushel in late January, when the dry weather was at its worst. While the USDA officially cut its estimate for the size of Argentina's soy harvest from 54 to 52 million tonnes, many analysts fretted that in the absence of rains, it could fall as low as 45 million tonnes.
That in turn would have pulled world 2017-18 closing world soy inventories to around 90 million tonnes, their lowest level since 2014-15's 78 million tonnes -a time when CBOT soy peaked at US$12.00/bushel -itself a far cry from CBOT soy's top near US$18.00/bushel six years ago. In the days prior to the USDA report's release, these concerns pulled CBOT soy from US$9.67/bushel to US$9.98/bushel -but the rally appeared to go flat upon the report's release.
On one hand, the USDA underestimated the probable damage done to Argentina's soy crop, reducing its harvest from 56 to 54 million tonnes, many independent analysts have already penciled in a 50-million tonne estimate -and this could be revised down to 45 million tonnes or lower in weeks to come.
Initially, these concerns were swamped by upward revisions to US and Brazilian soy supplies. Specifically, a 1.4 million tonne upgrade to US soybean inventories to 14.4 million tonnes, their highest level since 2007. It also revised its Brazil soy harvest estimate from 110 million to 112 million tonnes and export projection from 67 to 69 million tonnes. While the USDA slashed world soy inventories by 0.5 million tonnes, they were still on track to close at a record level exceeding 98 million tonnes.
As it coincided with volatile world financial markets and liquidity problems, the USDA report resulted in sharp but short-lived but sharp deflationary pressure. For a day or two, CBOT soy traded below US$9.70/bushel.
Argentina: Weekend rains disappoint, hot weather ahead?
--But even so, the potential loss of 10 million+ tonnes of Argentine soy can easily overwhelm these incremental world soybean supply increases -and now supplies are looking tighter than before. Immediately after CBOT soy fell in price, that weekend's rainfall in major Argentine corn and soy producing areas was significantly less than was expected, sparking fears of larger soy harvest size downgrades.
With Argentina's rainfall too sparse to restore its crop, meteorologists are calling for hot dry weather in the week to come. Within days, the USDA noted that November to January rainfall was 20% below normal level and that "in Argentina's main soybean production zone… drought has continued to worsen."
Within Argentina itself, the USDA reports that farmers have withheld selling their soybeans to crushers in anticipation of prices rising higher in weeks to come. All this brings closer the prospect of the world's top soymeal producer seeing its harvest size slashed by up 10 million tonnes.
While record world inventories can easily withstand any a resulting supply shock, 2017-18 world soy imports are on track to grow by 6 million tonnes, with 3.5 million tonnes of this demand growth coming from China. With imports growing from 144.2 million to 150.2 million tonnes, this year's world soy production is slated to fall by 3 million tonnes -but Argentina's drought could cause a much larger decline of more than 10 million tonnes.
With world liquidity restored after early February's financial market disruption, sparse rainfall pushed soy over US$10.00/bushel in the second week of February. Whether it stays there, falls towards US$9.50/bushel or climbs above US$11.00/bushel depends entirely on Argentina's weather. -But make no mistake: Soy is at least one to two marketing years before it can embark on a new era of firm prices, much less approach its record highs.
…but corn has already turned the corner
Soy may or may not enjoy a bear market mini-rally but corn appears further advanced on the journey towards its next market upturn. For unlike soy, world corn inventories have already started falling and are set to decline 11.6% this marketing year -but the final amount could be much more. Whereas world soy inventories were cut by half a million tonnes, those of corn fell by over 3 million tonnes.
More importantly, from its 229.7 million tonnes (and 21.6% stocks-to-use ratio) in the last marketing year, world corn inventories are on track to fall to 203.1 million tonnes (and a still high 19.0% stocks-to-use ratio) by August 31st of this year. The long-term, hinges on three nations: Brazil over the short-term, China thereafter and later, India.
Since peaking at 110.7 million tonnes in 2015-16 (when China's corn market reforms were announced) Chinese corn inventories fell to 100.7 million tonnes in 2016-17. With the USDA noting that government-sanctioned ethanol production is accelerating corn demand growth, it revised China's projected corn consumption to 242 million tonnes, from the 240 million previously estimated.
That in turn reduces China's closing 2017-18 inventory to around 78 million tonnes with the possibility they could (without imports) fall below 50 million tonnes in the next marketing year. -That's the same level that ten years ago forced China to become a mass corn importer.
For now, the imbalance between China's corn production and consumption has resulted in tight regional corn supplies. As a result, after falling to a low of RMB1,600/tonne (US$6.30/bushel) last year, dwindling post-harvest inventories have jacked up Dalian corn futures to around RMB2,200/tonne (US$8.70/bushel).
China: Buyers gradually approaching the world market
The USDA reports that an early 2018 corn shipment was purchased at US$300/tonne (US$7.62/bushel) after shipping and import duties -far more than US corn's current export price of US$245/tonne (US$6.22/bushel) after shipping and Chinese import duties -at a time when CBOT corn is trading below US$3.70/bushel.
While no great influx of US corn is expected into China, the USDA raised the country's 2017-18 corn import estimate to 3.5 million tonnes. That would be the highest quantity of corn imported by China in four growing seasons but still less than the over 5 million tonnes it bought in 2011-12 and 2014-15. -Needless to say, world corn inventories are far higher today than they were back then.
All this will not have an immediate rallying effect on corn. What matters is that with the dwindling of Chinese corn inventories being given an official government blessing, the world's largest agribusiness importer is no longer a deflationary weight on the world corn market.
Even if China imports 5 million tonnes this year instead of the 3.5 million forecast, its impact will be relatively neutral -for now. Beijing's use of ethanol production to boost demand means that we are a few years away from watching the world's largest agribusiness market turn into a net corn importer on the scale of Japan, South Korea or Mexico.
Brazil's crop is a short-term wild card
While China's buyers inch their way towards world feed grain markets market, Brazil could pull forward the day when corn becomes exciting: After a record 98.5 million tonne crop in 2016-17, the USDA's report kept Brazil's corn harvest estimate unchanged at 95.0 million tonnes -but this is already at odds with weather conditions.
Brazil's excessive rainfall is reducing its corn crop estimates. Leading Brazilian consultancy CONAB is projecting an 88 million tonne harvest. Such an outcome would reduce world inventories from their current 203 million tonnes to the 190 to 195 million tonne range. By no means would that spark the corn market inflation seen ten years ago, but it could push corn over US$4.00/bushel.
Granted, even at 190 million tonnes, with corn's stocks-to-use ratio around 18%, that hardly constitutes a feed grain bull market. Moreover, if Brazil's poor corn crop pushes corn over $4.00/bushel, it could cause US planted area to increase by enough to make that its price ceiling for some time. Even so, it is doubtful that Brazil can single-handedly satisfy China's corn import needs in the 2020s without a significant price increase within a few growing seasons.
India + Southeast Asia: The silent, invisible tigers
While China's corn demand growth gradually inches itself towards the world market, there is another demand driver invisibly marching towards the horizon. From 2000-01 through 200-09 inclusive, Indian corn yields grew at an average 3.2% annual rate -but the rate of increase fell to 1.2% in the 2007-08 to 2017-18 decade- and averaged 0.4% over the last five years.
Net result? India is repeating history: China's corn yields trailed demand, causing it to lose its corn export surplus by the early 2000s and become a net importer five years later. India has quietly gone from being a net exporter of several million tonnes annually to having balanced corn trade. Having never imported more than 29,000 tonnes of corn prior to 2015, India's corn imports will total 400,000 tonnes this marketing year.
While it is a matter of time before India enters the world corn market in a big way, Southeast Asia is already a major importer of feed crops or their derivatives. From slightly over 10 million tonnes in 2001-02, Southeast Asia's total imports of soybeans and soymeal rose at a 5.9% pace to a USDA estimated 25.3 million tonnes this year.
While ASEAN import growth flattened out during the years of feed market hyperinflation, ever since prices softened in 2012, the region's imports of soy and soybeans have rebounded, growing at a 5% annual rate over the last five years.
Moreover, to everyone's surprise, Southeast Asia has also become a far bigger customer for imported feed grains than China. The region's corn imports went from 4.2 million tonnes in 2001 to 6.5 million tonnes in 2010 and a USDA estimated 14.7 million tonnes this year. ASEAN corn import volumes would have grown even faster had it not been for government restrictions. That pushed up the region's feed wheat imports from 1.3 million tonnes in 2001 to 8.9 million tonnes in 2017.
Vietnam for example, went from exporting corn prior to 2005 to importing over a million tonnes of corn for the first time in 2009. Despite substituting cheaper feed wheat in place of corn whenever possible, Vietnam's corn imports will total nine million tonnes this year, along with 1.8 million tonnes of feed wheat.
Collectively the ten ASEAN nations encompassing countries such as Vietnam, Philippines, Indonesia, Thailand and Myanmar went from importing 5.6 million tonnes of corn and wheat in 2001 to 8.7 million tonnes in 2010. As was the case with soy-based inputs, imports of corn and wheat took off after their prices came down. From 10.6 million tonnes in 2012, total Southeast Asian imports of corn and feed wheat grew at a torrid 16.7% annual rate, to a USDA estimated 22.99 million tonnes in the current marketing year.
From all these short-term and long-term feed crop market figures, several highly important -but mostly unnoticed trends -are quietly gaining momentum. First, there is no way corn and soy will become scarce before 2020 the way it was at the turn of the decade. For now, we must satisfy ourselves with the occasional bear market rally.
Second, the five-year slump in feed crop prices is having its predictable, expected microeconomic impact: Ever since 2015, feed crop demand in the emerging markets of China, India and Southeast Asia has grown more rapidly than their domestic production.
The resulting import boom put bloated world corn inventories into a downtrend last year -and will do the same for soy this year. Corn led the feed crop market downturn and will recover more quickly too.
Third, ever since 2010, while China's government has taken steps to liberalize its long-term corn import growth, feed production has grown far more rapidly in India and Southeast Asia. From a practical perspective, this will make analyzing future corn and soy price trends more complicated, as demand will not be driven solely by China's vast, monolithic market.
Fourth, during the next feed market upturn, it is possible that soy demand will surge ahead of supply -but this time, India, Vietnam, Thailand and Indonesia will collectively exert as much upward pressure on soybean prices as China itself does. Similarly, as China's corn demand surges ahead of ahead of supply, it will have to compete against Vietnam and possibly even India for corn on the world market.
Conclusion? It will take a while to get here, but the next feed crop market boom could be even more inflationary, complicated -and profitable than the 2006-12 bull market.
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