July 2, 2018
Mid-Year Feed Crop Status: Corn markets rapidly tighten up, poor planting decisions deflate soy
How coincidences of nature and politics have pulled forward the next corn market rally -and extended soy's price slump. Is corn creeping towards a critical market inflection point?
By Eric J. Brooks
An eFeedLink Hot Hopic
Both soy and corn prices have taken a beating this past falling, the former falling 14% and the latter 20% from their respective Q2 peaks near US$4.10/bushel and US$10.07/bushel. By early July corn was trading just over US$3.50/bushel, soybeans near US$8.60/bushel. Even though soy fell by far more in price, nature and politics mean that beans have not completed their market downturn. Corn, by comparison, is enjoying rapidly improving market fundamentals.
Weather-wise, it is turning out to be a near-ideal growing season for corn and a good one for soybeans too. June was unusually warm and July's first two weeks are projected to feature 29C to 35C daily highs, with lows higher above 21C.
The abnormally hot US Midwest weather is being complemented by plentiful recent rainfall. Moreover, late June's plentiful precipitation is expected to continue into the first two weeks of July. The resulting combination of above average moisture and warm sunny conditions is creating momentum for a strong feed crop harvest.
At the end of June, the USDA announced that 73% of the soy crop was in good or excellent condition. This was the highest crop condition rating ever for a soy crop at the end of H1. Similarly, with 77% of the corn crop in good or excellent condition, that was the best end of H1 corn crop condition in over thirty years.
Even so, this year's crops are reflecting poor planting decisions made prior to China's recent imposition of a 25% tariff on US soy exports. In late Q1 and early Q2 when US farmers were preparing to sow crops, soy was trading over US$10.00/bushel while corn was in the US$3.75-95/bushel range. With spring time's soy:corn price ratio above 2.6, farmers shifted acres from corn to soy planting for a fourth consecutive year.
This merely reflected that corn prices have deflated and adjusted to their oversupply more than soy did. The latter received artificial price support from meal processing capacity to Latin currency deflation. Even so, soy's inability to adjust to its greater overcapacity had an unintended side-effect: For the first time since 1983, US soy crop acreage of (89.56 million acres) exceeded corn planted area (89.13 million acres).
Relative to corn, soy's price had been buoyed upwards by three other factors. First, by reducing its harvest from an initially anticipated 56 million tonnes to 37 million tonnes, Argentina's drought removed 19 million tonnes of soy from the world market. It is primarily because of Argentina that soy inventories are falling from 97.3 million tonnes in 2016-17 to close at 92.5 million tonnes the current marketing year -instead of rising to over 100 million tonnes, as otherwise would have been the case.
Second, these drought conditions coincided with the specter of a looming trade war between American and China. Expecting America to impose tariffs at any time, China proactively bought ten times more soybeans from Brazil and Argentina in the late 2017 and early 2018 than it normally does at that time of year.
Third; normally the world's largest soymeal exporter, Argentine crushers found themselves short of beans. That forced them to import soy from Paraguay. Besides allowing Paraguay to overtake Argentina as the world's number three soybean exporter, Argentine purchases added to the price pressure created by Argentina's drought and Chinese mass purchases of Latin beans outside their traditional exporting window.
-Both of these factors pushed the cost of soybeans above their market clearing price, which should have been below US$9.00/bushel. By keeping soy above US$10.00/bushel during the US crop planting time, US farmers literally planted more soy than the world needed. To balance supply and demand, a US crop below 110 million tonnes was needed. Instead, this year's soy harvest may equal or exceed last year's 119 million tonne record.
Unfortunately, prudent springtime planting decisions rarely reflect harvest time supply, demand or price circumstances -and that is especially the case this year. Even if nothing extraordinary had happened, good US growing weather was promising to put more deflationary pressure on a world that already had bloated inventories of both corn and soy.
As things turned out, an extraordinary coincidence did happen: China (which normally buys over half of US soy exports) imposed a 25% import tax on US soybeans -and did so just as ideal crop growing weather was creating bearish concerns about an oversupply of feed crops.
As things turned out, a combination of nature and political circumstances turned any decision to expand soy acreage -or take a long position in soy future -a bad one. China's imposition of a 25% tax on US soybean imports. Soy fell harder than corn and the soy:corn price ratio was now 2.4; below the 2.5 ratio that would have motivated more corn planting and less soy -except it was far too late in the year for farmers to shift their crop profile.
Expected at 98.57 million tonnes six months ago, 2017-18 closing inventories are now expected to be 92.49 million tonnes -some 6% lower than was anticipated in the first quarter -but far higher than should be the case. The drop mostly reflects Argentina's drought, which has reduced its closing inventories from the 36 million tonnes anticipated in February to 28 million tonnes today.
--But the real, market-driving story will in the 2018-19 inventory numbers: Instead of falling from 92 million tonnes to near 80 million tonnes, that excessive US soy acreage means that 2018-19 soy inventories will only fall to 87.02 million tonnes. As the attached chart shows, it means that for yet another year, soy production will nearly match demand, leaving inventories at highly deflationary, record high levels.
It also means that after the beans stocks-to-use ratio fell from whopping 29.5% in 2016-17 to 27.0% this year, it is on course to rise again, to 28.6% in 2018-19. It is going in the wrong direction, away from the below 25% required to firm up prices. Far from the 19% to 22% stocks-to-use ratio range needed to trigger a soy market rally.
-Nor do these estimates take into account China's rising domestic soybean production: The latter is expected to trim its bean import requirements from 103 million tonnes to 100 million tonnes. All this means that the next marketing year may see soy inventories stuck at their current, very high, non-market clearing levels.
Curiously, the US farmer planting error which has made soy's deflation worse is also bringing the world corn market back into balance -and very close to another feed grain rally. On one hand, a gross oversupply of wheat means that over the next four quarters, too much corn price inflation cannot happen.
Closing world wheat inventories jumped 12.3% in three years from 242 million tonnes in 2015-16 to 272 million tonnes by the end of the current marketing year. That gives a wheat stocks-to-use ratio of 36.6% --meaning that feed wheat will cap corn's price over the medium term.
On the other hand, since the early 2010s, corn's US planted acreage has decreased by almost seven million acres -almost the same amount that US soy acreage has risen over this time -and what has happened since corn started losing crop acreage to soy? Since peaking at 227.89 million tonnes and a 21.8% stocks-to-use ratio two years ago, corn inventories fell 15%, to 192.69 million tonnes and a stocks-to-use ratio of 18.2% --and more bullish news is ahead.
Compared to soy demand exceeding supply by 5.7 million tonnes in 2017-18 and only 2.5 million tonnes next year, corn usage exceeded harvests by 26 million tonnes in 2017-18 and will do so by 48 million tonnes next year.
Consequently, corn is on course to close 2018-19 with a stocks-to-use ratio of 14.2% --lower than the 14.3% that sparked its 2012 record rally, or the 15% stocks-to-use ratio that preceded its previous record 2008 rally.
A year is a long way to go and much can happen: Near US$3.50/bushel, corn returns are very low and will not increase planted acreage, but that could make the next rally even more volatile. We still do not know what impact soy's depressed price will have on South American feed grain and oilseed planting intentions. -But when China finally runs down its inventories and needs to import over 10 million tonnes of corn, it will not hesitate to do so, as it need no longer depend on US supplies.
Ultimately, we do not know if other events will intervene and stop corn's stocks-to-use ratio from falling below 15% by this time next year. We also do not know what next year's weather will be, let alone the state of world trade between America, Europe and China. Nevertheless, corn fundamentals are three to six quarters away from a point at which new information could spark a market rally. I personally expect China to spark the golden grain's next price secular price upturn.
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