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March 8, 2012
Corn market focus shifts to Chinese buyers, Brazilian growers
Optimistic USDA projections could make for weak second half corn prices but for now, we need to watch China's importing intentions and Brazil's winter time corn crop.
An eFeedLink Exclusive Commentary
by Eric J. BROOKS
After a volatile, late 2012 downtrend from earlier record highs, corn has been stabilizing in the US$6.30-6.40/bushel range of late, though trader's anxiety is clearly shifting towards questions of soy supply.
With world wheat inventories bursting at the seams and much EU rapeseed production devoted to biodiesel, corn is looking somewhat less substitutable than soy, which is steadily gaining strength. Whereas most of 2010 and 2011 saw corn pull up soy, market fears about drought's impact on the South America's soy harvest  are now lending support to corn. Along with the now familiar ritual of Brazilian and Argentine exports tied up at busy ports, such soy supply fears, as much as Argentina's slashed corn harvest, helped stabilize corn prices.
Large early USDA corn projection but…
Going forward, early USDA corn planting projections imply price weakness in the latter half of 2012. Based on its expectations of 94 million acres of corn planted and a yield of 164 bushels/acre (4.17 tonnes/acre), the USDA is projecting a monster-sized record crop of 362.5 million tonnes, some 47 million tonnes more than last year's harvest.
Under USDA expectations, a rebound in exports to 48 million tonnes will still leave enough surplus corn to let end-of -year inventories rebound to 41 million tonnes. That would be nearly double this year's level. It would push America's corn stock-to-use ratio to a much healthier 12%, up from 2011 lows near 5%.
The US corn numbers are complimented by similarly bountiful news from overseas. The International Grains Council expects a record amount of corn planted area this year, though at 167 million acres, it will be up by only 0.6% from last year's figure.

Similarly, central Brazil succeeded in quickly harvesting its soy crop, making possible an unusually bountiful second sahfrinha (winter season) corn harvest. This means that despite drought-induced damage to its main corn growing season, Brazil may yet pull off a record-level corn harvest of near 65 million tonnes, which would leave several million extra tonnes available for export. These extra few million tonnes in potential corn exports could profoundly turn the world corn market, especially if they coincide with a slower pace of Chinese corn imports.
…Brazil, China and US spring weather matter more
While early March's USDA report certainly can tweak the market downwards, the real determinant of second quarter corn prices will be the respective supply and demand actions of Brazilian winter weather and Chinese import buying intentions.
The difference between a bountiful Brazilian Safrinha corn harvest coinciding with slack Chinese buying interest and a disappointing second Brazilian crop coinciding with strong intense Chinese buying could amount to almost 10 million tonnes of corn exports -in either direction. All this puts Brazil and China in the corn market driver's seat, at least for the coming quarter.
Despite all the above bearish implications, some of the above numbers must be looked at in a skeptical way -as of early March, US planting has not yet even started. A sudden shift in the price ratio of feed grains or between feed grains and oil seeds could easily skew planting intentions. Moreover, the last five years has seen volatile price shifts caused by unstable weather overturning growing season assumptions.
Moreover, after being held back by slack biofuel output, corn was boosted by reports that in early March, weekly US corn ethanol production finally rose to 906,000 barrels a day, up 10,000 a day from late February's output. However, with ethanol inventories rising for 3 consecutive months, from 18 million barrels to and 22 million,  this year's rate of ethanol output growth should be at best, nominal.
At the same time however, the Food and Agricultural Policy Research Institute (FAPRI) has concluded removal of key US tax credits will not result in lower US ethanol output any time before 2020. Hence, while the burden created by ethanol production will ease, America's cars will continue to consume as much or more corn as its livestock.
Instead FAPRI expects an extra 3.1 million tonnes of corn than the USDA forecasts to be converted into ethanol, thereby curtailing any potential recovery in American corn inventories.
Interestingly, with ethanol output taking a breather after setting a record volume last year, indirect support is being provided to soy: According to analyst firm Allendale, the resulting lower supplies of DDGS, "is creating more demand for soymeal," and "ultimately supporting nearby soybeans."

In sum, the following feed crop factors are currently at play:  Drought damage to Argentina's corn crop and South America's soy harvest are equally responsible for corn prices staying above US$6/bushel during the first quarter of this year. Over the medium term, a good Brazilian sahfrinha corn crop would not make up for lost Argentine exports. However, if it coincides with slack Chinese buying interest, these two factors could make up for lost Argentine output.

For second half of 2012, optimistic USDA corn planting and crop yield numbers are essentially a mirror image of its equally rosy projections at this time last year. In 2011, bad weather forced the abandonment of some US corn planted area and damaged much of the crop, resulting in a harvest far below initial projections. Bad weather does not happen every year but a lot can still happen over the coming six months of America's growing season.

With America's crop not even planted yet, second half prices remain a black box but short-term strategy requires keeping a close eye on Brazil's corn harvest and China's feed demand.

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