FEED Business Worldwide - June 2012

 

Down with corn, up with soy: The global feed crop market shifts gears 

 

by Eric J. BROOKS

 

 

The last two quarters have seen clear evidence of market momentum shifting out of grains and into oilseeds. With this May's key USDA report, feed crop fundamentals have clearly shifted gears: Two years of grain shortages keynoted by Russia's 2010 drought, the start of Chinese corn imports and America's ethanol boom are now fading away. In its place, Chinese meat demand, high corn prices and arid South American weather have kick-started an oilseed rally that has at least one year and several market turning chapters ahead.

 

While the report's deflationary impact may cause up to one million acres to be shifted from corn to soy production, that will be offset by the agency's expected record 166 bushel/acre yield. The USDA expects last year's modest 313.92 million tonne corn crop to be followed by a whopping 375.68 million tonne harvest. That is a huge 19.7% year-on-year increase that easily eclipses the old 333 million tonne record.

 

 

 

Corn's demand fundamentals also look more bearish: Expecting the substitution of feed wheat in place of corn to expand, the USDA cut its domestic feed corn demand estimate by another 1.1% or 1.27 million tonnes, to just 115.58 million tonnes. With Ukraine, Russia and EU poised to grow smaller crops, one consequence of falling feed corn demand is a neutral outlook for wheat, where large inventories are counterbalanced by a lower world harvest and more feed use.

 

Even though America is taking up the slack created by Argentina's drought-shriveled crop, such a huge increase in corn supplies cannot be counterbalanced by a faster pace of US corn exports. Granted, exports have been revised from as low as 41 million tonnes in early 2011 to 47 million tonnes this marketing year and 48 million tonnes for 2012/13.  Unfortunately, this otherwise healthy 17% or 7 million tonne jump in US corn exports is completely swamped by a 62 million tonne increase in corn production.

 

Amid flattening ethanol production, stagnant feed demand and good growing weather, this will boost US corn inventories by 121%, from their thin 21.6 million tonne level to a much more normal 47.8 million tonnes. That gives a huge boost to America's corn stocks-to-use ratio: from a little over 5% in the first quarter of 2011 to a much more normal 13.7% after the next harvest. Under USDA projections, American corn inventories will rise to their highest level since 2006. Provided the Midwest's growing weather cooperates, world corn inventories will reach their highest volume in twelve years –and almost return to their historic abundance. This of course, badly deflates corn's price prospects.

 

Mind you, the USDA's bountiful, market-killing projections are not just limited to the United States corn crop –and it times, it remained unrealistic. For example, eFeedLink long ago estimated China's 2011/12 corn crop at 172 million tonnes, with some private analysts putting it as low as 168 million tonnes. The USDA however, kept its estimate for last year's harvest at a market balancing 191.75 million tonnes –with Dalian futures trading near US$10.50/bushel (at an 80% premium over CBOT corn), China's market behaves like it has a 20 million tonne corn shortfall, not like it is well-balanced.

 

Nevertheless, the USDA's 193 million tonne China corn harvest for this year is achievable, and could imply that Beijing will require fewer imports after the autumn harvest. At the same time, US and Chinese harvest gains complimented by smaller increases from South Africa to the Black Sea. For example, Ukraine's expected 2012/13 harvest of 24 million tonnes is 5.2% or 1.8 million tonnes above the 2011/12 total but more than double the 11.9 million harvested in 2010/11.

 

In fact, Ukraine's 2012/13 crop and expected exports of 14 million tonnes are just a shade below Argentina's next expected harvest of 25 million tonnes and 16 million tonnes of exports. That in turn limits the volume scope for American exports, thereby putting even more downward pressure on corn futures.