August 26, 2014
Global corn supplies: Harvests, exports flatten out amid high inventories
Four of the top five exporters are shipping less corn than two years ago but amid a bumper US harvest and bulging inventories, markets will stay soft.
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
Although the world has entered a period of cheap, plentiful inputs, in the case of corn, today's prices reflect yesterday's news.
Granted, the world now enjoys a surplus of corn and with US ethanol production flattening out, it is poised to do so for some time. However, most of the spectacular growth in corn output and inventories occurred between 2012 and the first half of this year. While the last two years of large inventory accumulations will not be run down anytime soon, their size and volume of world corn inventories is already topping out.
Rebounding from a historic US drought and the record prices that prevailed at the time, corn production increased 13.3%, from 868.8 million tonnes in 2012-13 to 984.37 tonnes in the 2013-14 marketing year that ended August 31st. For 2014-15 however, with prices falling 50% in two years and mass shift in acreage towards soy, world corn output will is flattening out, up a mere 0.1% to a USDA estimated 985.39 million tonnes.
US harvest underestimated, China overestimated?
The USDA estimates 1% to 2% harvest size increases in the top two producers, America and China. Accounting for almost three-fifths of world corn production and almost two-fifths of world corn exports, the size of both of these countries' harvests are controversial, though for different reasons.
On one hand, in the pages following our cover story, this month's Global Grains article explains why the US corn harvest appears to be deliberately underestimated and could come in 3% to 4% above last year's level. Moreover, with the proportion of ethanol that can be used in American petrol at its maximum proportion and America's vehicle population staying flat, the proportion of US corn production being made into ethanol is falling for the first time in nearly 15 years. This means taht all future increases in US corn harvests will go to the feed sector, instead of being diverted for biofuel use.
Hence, not only has US corn yield growth recovered strongly after several flat, weather-dented years. For the first time since the early 2000s, America is poised up to shift the majority of its future corn production increases into feed corn exports.
On the other hand, The USDA estimates that China has 20% of the world's population, consumes 22% of the world's corn, grows 23% of the world's corn and owns 45% of world corn inventories. China's official harvest size roughly equals it yearly corn consumption and its inventories can cover 4.5 months of domestic demand.
Moreover, China's government-rigged corn price is stuck near US$10.50/bushel at a time when CBOT corn has been trading for under US$4.00/bushel. This means that unlike farmers in the rest of the world, those in China have not been given any market incentive to reduce the number of acres planted with corn.
Therefore, it makes no sense that China should be short of corn, especially when feed demand is falling for an unprecedented second year in a row
Nevertheless, according to eFeedLink's mid-August China grains report, "Although the state corn auction will help to ease the supply crunch, the supply of corn is unlikely to meet demand before crops are harvested in the autumn." Obviously , something is amiss here and our focus section's last article casts examines the dubiousness of China's corn statistics in greater detail.
Although this casts some degree of uncertainty over our assessments, it is a safe assumption that with both America and China enjoying excellent growing weather, higher yields in both China and America have counterbalanced the latter's drop in corn acreage. Hence, the combined output of these two countries responsible for 59% of the world's corn production should rise a marginal 1% to 2% higher.
Global exporters curtail supplies
America and China's collective nominal contribution to higher world corn output is complimented by fourth ranked exporter Argentina, where the assumed return of normal precipitation is expected to see the upcoming harvest rise by 8.3% over the previous year. Even so, at 26.0 million tonnes, reduced corn acreage implies that unless weather boosts yields to unexpectedly high levels, output will remain below that country's record 2012-13 output of 27.0 million tonnes. It exports are expected to rise from 14 million tonnes in 2013-14 to 16 million tonnes in 2014-15, but remain well below the 18.69 million tonnes it exported in 2012-13.
Having said that, the above gains in corn output are being counterbalanced by significantly smaller harvests in other major exporters. For example, the USDA forecasts a sharp 5.1% output decrease in Brazil, where low corn prices are encouraging the same shift to soy acreage seen in the US, particularly for sahrinha (second season) crop planting. Although it saved the world corn market with its 81.5 million tonne harvest and more exports than the US in 2012-13, two years of falling corn prices have caused Brazil's corn harvest to fall first to 78.0 million tonnes in 2013-14 and an estimated 74.0 million tonnes in 2014-15.
Among global corn exporters, 2014-15 will see America export 5 million tonnes less corn than a year earlier. In the southern hemisphere, Brazil and Argentina are expected to ship 5 million and 2.68 million tonnes less than they did in 2012-13.
Regional Asian shipments in decline
Moreover, even corn supplies from regional, inexpensive corn exporters are falling. For example, in Ukraine, following 2013-14's massive 47.8% increase in output over the previous year from 20.9 to 30.9 million tonnes, the supply situation has strongly reversed itself.
Partly due to lower corn prices, partly due to the marketing and logistical disruptions caused by a Russian-backed insurgency, the USDA expects Ukraine's 2014-15 corn output to fall a sharp 12.6%, from 30.9 million tonnes to 27.0 million tonnes. Ukrainian exports will also fall a USDA estimated 15.8%, from 19 million tonnes in 2013-14 to 16 million tonnes in 2014-15, though the drop could be steeper if political troubles intensify. This is unfortunate for Ukraine, as the country had recently started diversifying its exports from their Central and Southeast Asian base, selling significant volumes to South Korea and Japan in recent years.
Similarly, once cheap, plentiful Indian corn is also becoming harder for Southeast feed mills to procure. Since 2010-11, its feed demand has is rising 7% to 10% annually but from 2010-11 to 2013-14, India's corn harvest only increased by average of 1.8% annually. Because of this year's delayed, arid monsoon, the 2014-15 harvest is poised to fall by 4.3% or 1 million tonnes, to 22 million tonnes. With India's corn harvests flattening out and domestic meat consumption skyrocketing, it will only export 2.5 million tonnes of corn, compared to 4.7 million tonnes two years ago.
With America exporting 5 million tonnes less than in the last marketing year and combined Brazilian, Ukrainian, Argentine and Indian corn exports falling by 10.5 million tonnes over two years, the remaining, small, marginal exporters cannot make up the difference. As a result, the USDA projects world corn exports to fall 7.7%, from 125.5 million tonnes in 2013-14 to 115.9 million tonnes in 2014-15. This is slightly above the average of 113.3 million tonnes of corn exported annually since 2011, but below the 2011-12 export volume of 117 million tonnes.
In short, except for the record US harvest, the middle of this year onwards is seeing all other major exporters drastically curtail their output and exports over the coming year. After aggressively boosting exports by 30 million tonnes from 2012-13 to 2013-14 to rebuild their inventories, major importers are also cutting back their purchases.
Corn supply growth has tapered off more than demand growth, for now, the net result will see a flattening out of inventories at a very high level, close to 200 million tonnes. As a result, even if weather conditions turn badly, it would take at least 1.5 to 2.0 years for the corn market to dissipate its large (and still growing) inventories and return to tighter fundamentals.
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