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COMMENTARY & ANALYSIS

February 15, 2019
 
Upside corn volatility and bloated bean fundamentals - with China in the middle of both
 
Corn's market fundamentals are clearly stronger and superior to those of soybeans but China plays a pivotal role in the fate of both feed of both feed crops.
 
By Eric J. Brooks
 
An eFeedLink Hot Topic
 
 
Inflationary downgrades to corn or soybean supplies here; deflationary news about Chinese purchases or trade talks there –but feed crops continue treading sideways, essentially going nowhere. Even so, a basic overview of fundamentals implies that corn will transition from going nowhere to going somewhere faster than soybeans can hope to do so.
 
Even so, the news is finally getting more bullish for beans. While the USDA's February report slashed world soybean export estimates slashed by 1.7 million tonnes from December levels, recent news from South America implies a much steeper downward revision is on its way.
 
In our last report, we warned that Brazil's 122 million crop estimate was too high and that the final harvest would amount to 110 to 115 million tonnes. Brazilian agricultural statistics agency CONAB recently cut its soy harvest estimate to 115 million tonnes, with a possibility of more downward revisions going into March. This is seven million tonnes below the 122 million expected prior to the USDA's 35-day shutdown and two million tonnes below its February estimate.
 
East of Brazil, a late spell of good weather helped Argentina keep its soy harvest downgrade to a minimum. Instead of the 50 million tonnes initially feared, 52 million tonnes will now be harvested, as opposed to 55 million tonnes initially forecast.
 
Even before the downgrade, the cumulative expansion in Argentina's rapidly growing feed demand and soymeal exports was running far ahead of its annual bean crop. Total soybean domestic use and exports increased from 39.5 million tonnes in 2011 to a USDA estimated 55.7 million tonnes this year. Over that time, its harvest rose from 40 million tonnes to 52 million tonnes.
 
With Argentina crushing so many beans into soymeal, it can only sustain export volumes by running down closing inventories from 41.3 million tonnes last marketing year to a USDA estimated 29.6 million tonnes this year. With the crop lower than expected, Argentine soybean inventories will fall 13.7 million tonnes, to 27.6 million tonnes.
 
 
On one hand, the report of a better-than-expected Argentine crop coincided with news that during the US government shutdown, 807,000 tonnes of US soybeans destined for and 444,000 tonnes en route tor "unknown" destinations (which could also include China) were canceled. When new order shipments made during the time period are added in, US soybean export cancellations exceeded exports by 610,900 tonnes during this period.
 
The cancellations are believed due to poor progress made during US-China trade negotiations, which were made worse by Canada's recent placing of a Chinese technology company executive, who is expected to be extradited to face criminal charges in the United States. With the cancellations totaling slightly over a million tonnes, Chinese buyers are expected to turn to Argentina, where the harvest is going to be coming in above expectations.
 
Interestingly, the news did not impact prices: By the end of trading, CBOT soybeans only fell 0.1%, settling down 1 cent lower to US$9.14/bushel. That's because even if US-China trade talks fail, it does not change the fact that world soybean supply-demand balances are finally getting tighter.
 
From December's USDA estimated 115.3 million tonnes and February's projected 106.7 million tonnes, Latin American harvest downgrades reduce closing world soybean inventories to a still-record (but much improved) 102.7 million tonnes.
 
At its current price of US$9.11/kg soybeans are trading nearly 40% below their US$15.15 secular high set back in early 2014. Over the past five years they have traded as low as 45% below their five-year peak, which means that at their current price level, beans have been moving sideways near their market bottom since June 2018, when China had purchased as much of Brazil's 2018 crop as it could.

On one hand, with beans trading near their market bottom and South American harvests coming in below expectations, soybeans have nowhere to go but up.  On the other hand, while beans usually rise and peak late in the second quarter, the magnitude and timing of this year's upturn hinges on the outcome of trade talks between China and America, with the latter expected to jack up import tariffs should an agreement not be reached by the end of February.
 
Its Q4 2018 market bottom near US$8.30/bushel was lower than several previous market bottoms it made in the US$8.63/bushel to US$9.12/bushel range from 2014 through 2017. This tells us that beans have yet to start a new price upturn cycle, as that usually happens market bottoms are higher than the previous ones. While the disappointing Latin American crop provides some support, the improved 29% soybean stocks-to-use ratio must drop several more percent before soy's market cycle can turn upwards. It needs to be falling towards 20% before we can speak of any sustained bull market.
 
Corn, by comparison, is in far better condition and closer to achieving a sharp market upturn –but still some distance from it. On one hand, from its market peak near US$8.45/bushel in 2012, corn bottomed out in 2014 near US$3.23/bushel in Q4 2014, down 62% from its secular peak. With every corn market low since 2014 closing higher than the previous one, the golden grain is in the early, gradually rising phase of a new market cycle.
 
Thanks to China's slowly liberalizing feed market, corn's supply-demand is actually far tighter than it appears to be. On one hand, corn's 27.4% stocks-to-use ratio does not appear to be much better than that of corn. However, with 208 million tonnes of the 310 million tonnes of corn inventories located in China's walled off-market, that leaves the rest of the world economy with 102 million tonnes of corn and a much, much lower stocks-to-use ratio (without China) of just 11.9%.
 
Hence, while China may not enter the world corn market for another few years when its inventories fall to critical levels, it would only take a bad US harvest like the one in 2012 to kick corn into a price rally that peaks somewhere above US$5.00/bushel –this means that this year we need to watch America's corn-growing weather more carefully– even if a serious drought does not occur, corn's price volatility and sensitivity to disappointing weather could be stronger-than-expected.
 
Over the longer term, the potential for rising corn market volatility and upward price movement outside China will be further magnified when China finally commences mass corn importation, sometime in the early to mid-2020s.
 
Soybeans also peaked near US$18.60 in 2012 and bottomed out approximately 55% below its market peak. Unlike corn's steeper, faster bottoming out, beans only recently hit their post-2012 low near US$8.30/bushel, in Q4 2018. Depending on how fast price cycles occur, beans must make two or three consecutively higher price bottoms over the next one to three years before they can make a solid market upturn.
 
On one hand, we can expect soybeans to rise in Q2 when the market starts buying South America's harvest. At that time, soy's price support will also come from any inclement US growing weather and planting intentions, which with the Soy:Corn price ratio below 2.5 (and at 2.42) implies a reduction in bean growing acreage. –Even so, it will be rising from the US$9.10-9.20/bushel range, which is where its previous market bottom was.
 
On the other hand, soy's supply situation remains too bloated for any market-driven volatility. In their place, US-China trade talks can produce either upside or downside price volatility, depending on their outcome. Even so, both from a short-term and long-term perspective, corn offers a better combination of greater potential for price volatility, with a bias towards upward movement.
 


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