June 19, 2014
Firm corn, weaker soy ahead
Ground level market signals point towards higher US corn consumption, higher feed demand and a shift in acreage towards soy.
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
Three months of excellent US crop growing weather has taken a toll on feed grain prices, with CBOT corn falling approximately 13%, from US$5.00/bushel in the early second quarter, to bottom out near US$4.35/bushel in mid June. With the USDA's June WASDE report leaving 2014-15 estimates for America's corn harvest, feed demand, inventories and exports, there is nothing in the way of official market news to prop up prices.
Normally, the absence of newsworthy items usually makes prices sink. In this case however, trends that may influence such statistics within one to two months that corn has touched a short term market bottom and may climb in price for most of the third quarter.
Biofuels, physical markets imply firm corn fundamentals
Although biofuels are no longer boosting prices to record highs, they do have the effect of putting a floor under prices: Recent months have seen corn fall below US$5/bushel while both petroleum and US gasoline prices increased. In particular, anxiety over Iraqi oil supplies coincided with the US driving season, sending its gasoline prices up 8% in the second and third week of June. This greatly widened ethanol profit margins, causing output and biofuel corn demand to both skyrocket.
Two years after many stated that its production would, "hit a wall", early June saw US ethanol plants producing 944,000 barrels day. By mid-month, a new ethanol output jumped to a record 972,000 barrels/day.
But there is more than biofuel to strengthening corn fundamentals: Although CBOT corn has fallen by over 60cents/bushel, American cash corn has been selling at a growing premium to its futures market price. Both in interior livestock producing regions and at export ports like the Gulf of Mexico, the first three weeks of June saw cash corn gain price even as futures prices sagged.
This implies that America's corn demand is rising from all directions, be they domestic livestock, biofuel or exports. Sociéte General analyst Christopher Narayan notes that, "Corn demand remains stronger than expected in both the export and ethanol markets", adding that, "Feed consumption too, through the first two marketing quarters of 2013-14 suggests higher-than -expected demand when compared to the historical percentage use by marketing quarter." Narayan concluded that cash corn's consistent outperformance of futures implies that, "prices are nearing a bottom and poised for a modest rally."
With strong cash corn markets implying that feed consumption, ethanol output and exports are stronger than forecasted, there is also a supply-side wild card at work. June's WASDE report expects, ""slightly slower-than-normal mid-May [corn] planting progress expected to be offset by very favourable early season crop and weather conditions."
That statement strongly assumes that the only reason US farmers have slowed down their pace of corn planting is weather conditions; but is this truly the case? A soy/corn price ratio above 2.5 favours corn planting; soy planting usually offers higher returns when the ratio is above. At the time of publication, the corn/soy price ratio had persistently in the 2.7 to 2.8 range for nearly two months.
Keep in mind that even when corn's price was high relative to soy, the USDA consistently overestimated its planted acreage. With soy becoming more profitable and corn's longer maturation time making it easier to plant soy in late May and early June, might not US farmers be shifting some acreage from corn to soy planting?
If a slight shift in acreage from corn to soy coincides with higher than expected feed, biofuel and export demand, it would be enough to induce a slight rebound in CBOT corn to near the US$5/bushel level.
Deflationary factors converge on soy
Such a shift would also make for a larger than expected US soy crop. A few extra tonnes would profoundly impact soy inventories. On one hand, the new harvest will not come in on time for the 2013-14 marketing year, where the USDA estimates all-time low closing US inventories of 3.4 million tonnes and an ultra-low stocks-to-use ratio of 3.7%. This is the case even though America, the world's second largest soy exporter, is being forced to import a record 2.4 million tonnes of South American soy to ease its
Although America's razor thin inventories are more than offset by South America's collective 38 million tonnes of closing inventories, there is an additional mitigating factor: To ease its domestic feed-to-meat supply chain shortages, the world's second largest soy exporter has been forced to import a record 2.4 million tonnes of soya beans from Latin America. That is one reason why, even though both corn and soy prices wilted in America's good crop growing weather, soy prices held up better. Along with China's early year soy import binge, this played a key role in driving the soy/corn price ratio above 2.7.
Every market movement carries with it the seeds of its own undoing. In the case of soy, its higher price relative to corn likely attracted enough acres from corn to boost closing 2014-15 US inventories from 8.8 million tonnes to the 10 to 11 million tonne range.
With the (more deflationary) Latin American soy exporting half of the year in full swing and Chinese feed demand staying flat in the face of aggressive early year importing, soy looks increasingly soft on the world market. It also is showing signs of softness in physical (as opposed to futures) domestic US markets. Whereas cash corn is selling at a marked premium to its futures price, US cash soya beans are selling at a discount to CBOT soy.
Moreover, even in futures markets themselves, we see ominous movements. Reflecting both tight US supplies and the expectation of a very large American crop, the first half of 2014 saw old crop soy priced higher than 2014-15 marketing year futures. In mid June, old crop soy suddenly fell sharply, narrowing the premium it had over 2014-15 soy futures.
These ground level, physical market signals in America, the world's tightest soy market appear destined to deflate export prices and paper assets such as CBOT soy futures in months to come.
Competition from palm oil, other oilseeds
Soy also faces rising competition from rival oilseeds and protein meals.
Excellent cross-hemisphere growing weather means that the USDA is forecasting record rapeseed crops for Canada, Australia, the European Union and Russia. This has caused MATIF rapeseed's price to dive 25% from mid April to mid June.
Similarly, not only did Southeast Asia's early 2014 drought break in March, but the predicted El Nino dry spell has thus far, failed to materialize. As a result, Malaysia and Indonesia have enjoyed a second quarter of plentiful showers, keeping palm oil production ahead of conservative early year expectations. Hence, after peaking near US$904/tonne in early March and falling hard when the rains resumed that month, palm oil prices stayed around the US$770/tonne range. This is a 15% price drop from earlier in the year.
Even though it is now becoming more expensive, even fishmeal put downward pressure on soy. In China, the second quarter saw fishmeal priced 25% lower than a year earlier, versus only a 1% drop in soymeal costs. This greatly motivated China's feed mills to substitute fishmeal in place of soy, a trend that will continue until mid-year, when fishmeal is expected to lose its price advantage. By then however, between its overly large H1 2014 import volume and fishmeal substitution in place of soymeal should dampen China's pace of soy imports in the second half this year.
Hence, amid plentiful Latin supplies, deflating US cash markets, good crop growing weather, the prospect of higher than expected planted acreage and competition from other oilseeds, the soy/corn price ratio looks set to fall from its current 2.75 range to 2.4 or lower.
A mild rally in corn prices could help close the price premium between these two feed crops, but at this point, it looks far more likely for soy to fall hard, while corn rises slightly or stays flat.
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