FEED Business Worldwide - August, 2011
Swan dive & a dead cat bounce: Corn falls, then rebounds as buyers from China, Japan & ASEAN rush in
by Eric J. BROOKS
The anticipated mid-year market crack came and corn fell sharply by over 20% before making a dead-cat bounce back above US$6/bushel, where it presently resides. This plunge was exceptionally brutal, with corn suffering its heaviest losses since January 2010's surprising large (and completely erroneous) USDA corn supply upgrades.
While eFeedLink reports dating back to April and May anticipated lower mid-year corn prices, so did Chinese and Japanese traders, who postponed their usual buying patterns only to rush back into the market after CBOT corn crashed.
Are USDA numbers inaccurate again?
US corn's spot price plunged by a record 10% in a day after the USDA reported that contrary to common market opinion, corn planted acreage is at its second highest level since World War II. Even so, there exists considerable skepticism on the part of US farmers: They wonder how so much land could have been so quickly replanted after having been under water during the US Midwest's widespread June floods.
Even rival US government agencies disagree with the USDA's assessment. A July 4th Reuters report stated that, "Some traders said the USDA was too optimistic as, for example, it has North Dakota plantings down by 1 percent, while state officials say 25 percent may go idle." Hence, it would not be surprising if the USDA downwardly revises planted acres and harvest estimates in months to come: After all, it has put out bountiful supply projections only to drastically revise them downwards later several times over the last year and a half.
At the very least, the USDA's conservative assessment that North Dakota only lost 2.3m acres of planted crop sowings to poor weather is contradicted by other government statistics, which indicated that insurance claims for 6.3 million acres of crops lost to bad weather were made. A 274% discrepancy between what the USDA says and other official numbers imply is not to be taken lightly. Perhaps that is why Morgan Stanley opined that it was, "skeptical, and questions the accuracy, of the USDA's estimates."
Although next week's USDA report is being intensely anticipated, for now, the market has settled out. While there is little scope for sustained rallies before the late third quarter, the supply constraints that pushed corn to its recent US$6.50/bushel to US$8.00/bushel price range remain in effect.
Indeed, many factors are working to keep corn at historically high range anywhere from US$6/bushel to its recent price record. The fact corn remains in short supply is evident in the behaviour of Asian corn importers. If the supply situation was really improving, they would have waited for corn to drop another dollar in price. Instead, as soon as corn breached US$6/bushel, they rushed in, pushing its price back above this level.
Japan, China, Indonesia snapping up imports
The same Reuters report added that with prices now down, "Feed millers in Japan, the world's biggest corn buyer, are expected to lock-in supplies, buying cargoes for August and September shipment after a slowdown in imports since the March earthquake."
Interestingly, Japan which usually finishes up its third quarter [June to September] purchases by early July did something unusual. As of early July, it had covered only 20% of its August corn import requirements while leaving its positions open for over half its September imports. However, when prices dipped, Japanese traders were seen pouncing back into the market. They obviously were expecting prices to fall and took advantage of the market drop.
Certainly, Japanese traders were not alone in this type of strategic behaviour. Abah Ofton, an agricultural analyst with Standard Chartered Bank in Singapore commented that, "We are going to see [Asian importer] demand at these levels."
Apparently, no sooner were those words spoken that China again seemed to be quietly, by stealth, importing more corn, with confirmation to come only weeks or months later. Bloomberg reported on July 5th that in the week corn dipped below US$6/bushel, "Exporters in the U.S., the world's largest corn grower and shipper, sold 1.14 million metric tons of the grain for unknown destinations, the department of agriculture said July 1. Chinamay have been the buyer, researcher Grain.gov.cn said yesterday."
Reuters reported on July 4th that, "Sinograin, which manages state reserves, bought 1.0 to 1.6 million tonnes of corn on Wednesday [June 30], a day before the Chicago sell-off, and analysts believe lower prices should prompt the country's state-run grain agencies to further boost government's reserves through imports."
Several days after corn's price bottomed out, Commerzbank analyst Carsten Fritsch commented that, "Plummeting grain prices last week have resulted in an increase in actual physical transactions," adding that, "China is well-known as a price-conscious customer, and there are a number of signs that it was behind the major order placed last week."
After corn crashed, Morgan Stanley noted that with US corn now cheaper than southern China domestic corn by $0.22/bushel [excluding VAT], "the export arbitrage window to China has opened." It concluded that, "Given an admitted 10m-tonne deficit between production and demand in China this year, we do not rule out the possibility of further Chinese purchases to rebuild government strategic reserves."
ASEAN's impact is growing & underrated
Nor are China or Japan the only large Asian customers with a growing appetite for corn. Indonesia imported approximately 1.25 million tonnes of corn last year. By April, the USDA's Jakarta attachÃ© was projecting 2.5 million tonnes would be imported. As of late June, the Indonesian Feed Mill Association was estimating 3 million tonnes of corn would need to be imported this year. This is partly due to nervous feed mills taking advantage of what they perceive to be temporary dips in corn's price, part unexpectedly high domestic demand and a disappointing local crop.
In that sense, with Vietnam's corn import growth leveling off after nearly tripling over several years, Indonesia has taken over as the driver of ASEAN's corn import binge. At the same time, the only reason Vietnam (which imported 640,000 tonnes in 2008) is tapering off its corn import growth at 1.8 million tonnes is due to the record amount of feed wheat it is currently importing.
That however, does not change the profoundness of what is occurring: With eyes are focused on China, very few people notice that Southeast Asia's corn imports are undergoing a drastic rise.
When recent USDA and Indonesian Feed Mill Association revisions are factored in, collectively, Malaysia, Philippines, Indonesia, Thailand and Vietnam are importing at least 7.5 million tonnes of corn this year. This is 74% or 3.2 million tonnes more than they did in 2008. Consequently, while everyone waits for China to become a mass importer of corn, equally rapid import growth is already happening in Southeast Asia. Indeed, we can expect ASEAN's corn import volume to overtake that of South Korea and catch up to Mexico within few years.
Futures distort prices, spot/cash price equality creates an import window?
Nevertheless, with China's day of reckoning coming, Southeast Asia cannot ever catch up to north Asia's corn import volume.
In fact, the scarcity of China's corn market exposes the extent to which finance disconnects international corn prices from market fundamentals. For the last month has seen a big disconnect between China's corn futures market and the price livestock farmers pay for their corn.
China's corn prices are up some 25% this year. The corn price feed mills and corn processors pay has gone up in 11 of the last twelve months and every month since January. Yet in June, China's spot and cash corn prices rose an average of 3.2% while Dalian futures fell 5%.
A cross over between Dalian futures and cash corn last occurred in the second quarter 2010 and coincided with the start of 1.5 million tonnes of corn imports. Late June's reports of China again importing US corn is coinciding with a cross-over of Dalian futures and cash corn prices.
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