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COMMENTARY & ANALYSIS
 
 
September 15, 2017

A Mid-Autumn bear fest?
 
Prices slump back toward rock-bottom levels. While that can make for safe investing, it will take an extraordinary event to kick this market out of its doldrums.
  
By Eric J. BROOKS
 
An eFeedLink Hot Topic
 
 
Chinese culture's Mid-Autumn Festival is keynoted by feasts and family reunions. This year, grain traders might remember it for the uninvited bears gate crashing the harvest. Nature's bounty is the market's tragedy. Good weather has blessed this year's US harvest -and cursed grain prices. From mid-summer highs near US$4.20/bushel, corn has fallen by more than 15%. At just over US$3.50/bushel, it barely covers the growing expenses of some farmers.
 
After very dry mid-year conditions were snuffed out by abundant late July and early August rainfall, a couple of hurricanes spared the Midwest damage -while giving corn and soy crops a timely last fill-up of needed moisture. That could not undo the most severe damage from the mid-year dry spell but was enough to restore the rest of the crop.
 
Corn yields, which were being projected as low as 160bushels/acre two months ago and 168bushels/acre in early September, were estimated at a whopping 169.9 bushels/acre, the third highest on record and down only 2.7% from last year's record 174.6 bushels/acre. The corn crop, which some analysts projected as low 345 million tonnes in their mid-year estimates is now estimated at 360.3 million tonnes.
 
While that's down 6.4% from last year's record 384.3 million tonnes, with exports falling by 11 million tonnes (to 48 million tonnes) amid slack domestic demand, it leaves 2017-18 closing US corn inventories unchanged at 59.8 million tonnes. That leaves America's corn stocks-to-use ratio stuck at a deflationary (though not overly depressed) 18.8%.
 
Not only did the weather gods make for a bountiful US harvest, even bullish overseas news had no effect. Whereas America's drought broke, China's persistent dry weather is leading to a harvest of 215 million tonnes and domestic consumption of 238 million tonnes. While a 23-million tonne gap between production and consumption would normally inflate prices, China's controlled market is exceptional.
 
Chinese corn inventories peaked at 111 million tonnes two years ago and entered 2017-18 at 101 million tonnes. This year's parched harvest means that inventories will end the current marketing year at 81 million tonnes, making for a Chinese corn-stocks-to-use ratio of 34%, imports unchanged from last year's 3 million tonne volume. -One must always keep in mind that the corn market's current deflationary state is due to the fact that China is currently importing 15 to 20 million tonnes less corn than what analysts projected at the start of our current decade.
 
All this has profoundly affected world corn market balances. Instead of falling from 227 million tonnes to the 190 million tonnes as was hoped for just two months ago, world corn inventories will fall to 202 tonnes. With 2017-18 world corn consumption almost unchanged from last year at 1.057 billion tonnes, it makes for a 19% world corn-stocks-to-use ratio.
 
We do not yet know how South America's upcoming growing season will impact these numbers but at the very least, the stocks-to-use ratio must fall by 3% to 5% for a significantly higher price level to be justified.

Moreover, the favorable weather has cursed the soybean market even more than that for corn. More resilient than corn, soy used the last six rainy weeks to boost yields even above the most optimistic spring time expectations. Defying predictions of falling into the 45 to 46bushel/acre range, the USDA found early September soy yields rebounding to 49.9bushels/acre.
 
That's 4% lower than last year's 52bushel/acre yield, Spring time's favorable soy:corn price ratio had boosted the latter's acreage by 7.2%, resulting in a bumper harvest. Consequently, instead of falling back from last year's 117 million tonnes to 105 million tonnes (as was thought at the start of Q3), soy's drastic yield improvement will make for a 120.6 million tonne harvest. This exceeds last Fall's record soy harvest by 2.9%.
 
It will also have a highly devastating impact on bloated soy inventories and market fundamentals. In the five growing seasons since 2012-13, America's 43%, 36.3 million tonne increase in annual soy production exceeds the 35 million 35.9 million tonne increase in Chinese soy import volumes over this same time -and China buys 64% of world soy imports. Record US soy production comes alongside an extra 30 million+ tonnes grown by Brazil and Argentina compared to five years ago.
 
Such fast soy production has overwhelmed the world market. As the attached graph clearly shows, periods of soy market inflation (2007-9, 2011-12) coincide with periods when China's corn import demand greatly outpaces world corn production. That is not happening at this time. It will take a longer period of imports growing faster than production than it did in 2012. Why? Because of large inventory volumes that need to wound down first.
 
From 55.2 million tonnes in 2012-13, soy inventories ballooned up to 96 million tonnes at the start of the current marketing year. It was initially thought that America's drought would cut its soy production by up to 10 million tonnes, possibly bringing world soy inventories into the 85 to 90 million tonne range.
 
Thanks to America's bumper harvest, only a disappointing South American harvest can stop soy inventories from rising even higher. At a record 97.5, the soy stocks-to-use ratio is kept at a bloated 28.3%.
 
Feed buyers have much reason to cheer but is there any information that could be a portent of more bullish market outcomes? Only several modest facts.
 
First Hueber Report founder Dan Hueber notes that at 0.34g, the USDA's average soybean pod weight (which it uses to estimate the crop yield) is a whopping 108% higher than the 0.164g average soybean pod weight over the 2012-16 growing seasons. Given the unstable weather experienced during this US gorwing season, Hueber considers the USDA's 0.34g pod weight estimated "optimistic". He believes that both the soy yield and record crop could be adjusted downwards, "once the [soy harvesting] combines really begin to roll."
 
It should be noted that even a wild, massive 5% to 7% adjustment in the US soy yield would still leave the world stocks-to-use ratio in deflation territory, well north of the 25% level. It would take a catastrophic South American growing season to pull inventories below such bloated levels and spark a genuine rally.
 
Already selling close to its production cost, corn is both a safer buy and has more upward potential, especially over the longer term. -Here, the nation to watch is China. On one hand, it has more than enough corn to ride out supply-side fluctuations, including a poor South American harvest. On the other hand, Chinese corn inventories, while large, are being officially encouraged to fall back to normal levels.
 
Towards this end, China's once anti-ethanol government recently announced its intention to start making 4 million tonnes of ethanol annually by 2020. That would boost China's corn consumption (and reduced inventories) by  12 million tonnes annually. Some analysts believe that Beijing could actually aim for up to 8 million tonnes of ethanol production -and related corn consumption increase of 24 million tonnes annually.
 
That could bring forward an important day: The time when China's slowly liberalizing corn buyers finally enter the world market in a big way. For now, all feed buyers need to look out for -and all grain traders can look forward to -is either a frosty harvest or lousy South American crop growing conditions.
 
While corn is a safer bet than soy, it doesn't mean the golden grain will go anywhere anytime soon. Hence, while investing in corn is safe and soy is riskier, this is a time more suited to monitoring information -especially related to China- than it is for making investment gambles in feed crops.
 


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