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COMMENTARY & ANALYSIS

September 14, 2018

Corn takes one last beating -and gets ready to firm up in price
 
Despite this year's surprisingly large US harvest, inventories are falling and the stocks-to-use ratio is headed to low levels seen during record-setting rallies. Expect firm Q4 prices and a strong 2019 market -with abundant feed wheat, deflated beans acting as price lids.
 
By Eric J. Brooks

An eFeedLink Hot topic
 

With world feed crop inventories already bloated, the bountiful harvest implications of September's harvest time USDA report dealt a hammer blow to feed crop prices, sending corn down to nearly US$3.50/bushel. That's because the US harvest estimate kept expanding, from an initial estimate of 356.6 million tonnes, which would have been 3.9% less than last year's crop.
 
 
Early growing season worries about crop growing weather turned out to be groundless. By August, fears of dry summer weather dissipated, forcing a large harvest revision from 361 million to 370 million tonnes.
 
With the past month's weather turning out even better than expected, corn yields were revised upwards to a record 181 bushels/acre. Consequently, the USDA is now projecting an even larger 376.2 million tonne harvest. While just a 1.4% increase over last year's harvest size, it is the second largest on record -and it is leaving America with far more surplus corn than was expected.
 
From 39.4 million tonnes in July, America's 2018-19 closing inventory estimate has been lifted to 45.1 million tonnes. The good news is that despite this year's bearishly large harvest, the market is doing its best to keep surpluses from growing. Except for their anxiety-ridden July and August, corn prices have spent most of the past two years in the US$3.50/bushel to US$3.80/bushel range -and consumption is picking up.

Had annual corn demand not picked up from 136.5 million tonnes in April to 141.6 million this month, closing inventories would have stayed unchanged near 50.6 million tonnes. They are now projected to close at 45.1 million tonnes, rather than the 39.5 million tonnes estimated as recently as July.
 
With both US and Chinese crops coming in larger than last Autumn, world corn production only declined for one year, before rising a projected a rather large 3.5% or 36 million tonnes, from 2017-18's 1.033 billion tonnes to a USDA estimated 1.069 billion this year. Fortunately, the above mentioned low corn prices and China's rising ethanol production pushed up corn demand a slightly faster 3.7%, to a record 1,106.1 million tonnes, 40 million tonnes more than in the previous marketing year.
 
This means world corn stocks will continue receding from their record 227.8 million tonne peak of 2016-17 and this past marketing year's 194.2 million tonnes, to close the 2018-19 marketing year down another 23.6%, at a USDA estimated 157 million tonnes.
 
On one hand, China's 25% tax on American soybeans will cause some acres to be transferred back to corn cultivation. That will slow down the rate at which US and world corn inventories decline, thereby postponing the next market upturn.
 
On one hand, unlike soy, corn is making a lot of progress. In 2017-18, corn's world stocks-to-use ratio has fallen very sharply: From 22.0% in 2016-17 (when inventories were at record levels) to 18.2% this marketing year. On the basis of current estimates, it will be 14.2% at the end of the 2018-19 marketing year.
 
--That is a lower stocks-to-use ratio than the one which set all-time corn price records during the 2007-08 rally (15.0%) and that same level of the drought-induced record of 2011-12 (14.2%).
 
Does that mean that corn is due for another price rally? The answer is probably not yet: The 2011-12 rally saw a 14.2% corn stocks-to-use ratio coincide with a serious US drought and two consecutive drought-reduced Latin American harvests.
 
If progress towards the projected 14.2% corn stocks-to-use ratio continues, it means that after enduring one last harvest time deflationary beating, corn prices will have finished bottoming out and start firming up, probably into the US$3.85/bushel to US$4.15/bushel range by late Q4. By that time, the approach of a below 15% stocks-to-use ratio will be enhanced by early Latin American growing season uncertainty. That could lift prices by up to 20% from the near US$3.51/bushel rate at the time of this article's publication.
 
But will corn take off into the sort of hyper-inflationary rally seen in 2007-08 and 2011-12? Even though corn's fundamentals are much stronger than many realize, that may not be the case this time.
 
On one hand, whereas closing world soybean inventories are 277% higher today (108,264 tonnes) than twenty years ago (28,700 tonnes), corn inventories are 17.9% lower in 2018-19 (157,000 tonnes) than in 1998-99 (191,000 tonnes). This is the case even though world meat consumption is much higher today than it was two decades ago.
 
Moreover, both the 2007-08 rally and the 2012-13 rally coincided with large drops in Chinese corn inventories. From their secular peak of approximately 111,000 tonnes in 2015-16, Chinese corn inventories will have fallen by 47%, to 58,500 tonnes by the end of 2018-19 next August 31.
 
From 2020 onwards, China's corn market liberalization and rising ethanol production are poised to make Chinese corn inventories fall into the same 35,000 tonnes to 45,000-tonne range that forced Beijing to enter the world corn market in the late 2000s.
 
On the other hand, the last two corn market rallies coincided with record soybean market rallies -but this time, these two commodities are out of sync. Both corn and soy inventories were at record high levels in 2015-16 -but whereas corn inventories have fallen by 31% over the last two years, those of soy increased another 11.9%, from 96.7 million to 108.2 million tonnes this year, breaking its old record in the process.
 
Soy inventories need to fall for at least two to three consecutive years to reach the 53 to 63 million tonne lows that powered beans' 2007-08 and 2012-13 rallies -but by next August, world corn inventories are on track to fall into the same 120 to 135 million tonne range last seen during the 2011-13 market rallies -but this time, the stocks-to-use ratio will be lower than it was back then.
 
All this points to strong corn markets starting in 2019 but weak soybean markets into at least 2021 -and the strongest market rallies almost always happen when both grains and oilseeds are in simultaneously in short supply.
 
Furthermore, much like soy, world wheat stocks refuse to fall. At 261 million tonnes, they will close 2018-19 104% higher than they did in 2007-08 and 31% higher than they did during the stronger 2011-13 when feed wheat was frequently substituted in place of corn.
 
This means that even if China's import tax on US discourages Latin farmers from growing enough corn and a drought follows, corn will rally abut abundant feed wheat supplies will cap its potential for setting price records, as will the deflationary sentiment that still haunts soybean markets.
 
From the perspective of September 2018, it would be difficult to lose money if you bought corn today and held on to it until 2019. Prices will soon firm up, possibly even rise above US$4.00/bushel. Thereafter, with China encouraging Brazilian farms to grow too much soy (and not enough corn), an unfavorable US growing season could kick corn as high as US$6.00/bushel –but with oilseeds stuck in deflation and feed wheat supplies on the horizon, it will not be setting new price records the way it did in the two previous rallies.
 


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