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COMMENTARY & ANALYSIS
 
 
November 10, 2017
 
A feed market bear party: Prices dive on record crop yields, fat inventories
 
Bumper US  harvests, excess supplies mean that livestock growers will enjoy several more years of low feed costs. Soymeal prevents beans from fully deflating in response to its greater oversupply, undermining oilseed's long-term market potential.
 
By Eric J. Brooks
 
An eFeedLink Hot Topic
 
 
It is a wonderful time to be a livestock farmer and a terrible time to grow feed crops. In a stunning reversal of drought fears and sub-350 million tonne crop speculation of just three months earlier, the USDA announced a record harvest corn yield of 175.4bushels/acre.
 
Greatly exceeding the previous 171.7bushels/acre record set in 2015, it results in a 370.3 million tonne US corn harvest. With significantly less acreage planted this year, it is 3.8% below last year's 384.8 million tonne record -but far higher than the 350 to 360 million tonnes expected in mid-summer.
 
With harvests and growth prospects in other countries meeting expectations, corn sank like a rock in water on the news. Trading for US$3.42/bushel at the time of publication, it is 17% below the US$4.14/bushel it was trading for just three months ago.
 
Both US livestock farms and those overseas are expected to take advantage of the low prices, with American feed demand and exports each projected to rise by approximately 2 million tonnes each. That however, is not enough to keep US closing corn inventories from rising from 2016-17's 58.3 million tonnes to 63.2 million tonnes in 2017-18, their highest level in thirty years.
 
Consequently, unless South America's crop growing weather turns unexpectedly bad before Christmas, CBOT corn's price appears poised to drift down 5% to 10%, closer to the US$3.00/bushel mark.
 
The only good news is that unlike soy, corn's bloated inventories are definitely downtrending: From 2016-17's record 226.6 million tonnes to a USDA estimated 203.9 million tonnes in 2017-18. Even though America's bumper harvest upped this estimated from the previous month's 200 million tonne level, the 10% drop will leave corn stocks at their lowest level since 2014 -even so, at 19%, the world corn stocks-to-use ratio needs to fall by nearly a third before a strong rally could be sparked.
 
The bad news is that 22.0 million tonnes of the projected 22.7 million fall in world corn inventories will occur in China -a stand-alone country that is disconnected from the world corn market. Outside of China's walled-off market, corn supplies in the rest of the world have leveled out but not yet started to fall.
 
Due to Beijing's gradual move towards free corn markets, China's massive corn pile has fallen from 110.8 million tonnes in 2015-16 to a USDA projected 78.7 million at the close of the 2017-18 marketing year. Hence, even with the ongoing reduction in China's corn stockpile, it will be several years before it needs mass corn imports.
 
For now, the entire improvement in world corn inventories has zero impact on the bloated world market. Remove China from the world market and the world stocks-to-use ratio is 15% --but until China enters the world market and drives import growth, that statistics will not mean much. Thus, short of a disastrous Latin harvest, corn prices will remain stagnant at best.
 
Bearish as corn's fundamentals may be, the news is even worse for soy. With beans offering better returns than corn, many American farmers switched their crop farming acres from the former to the latter. At 49.5bushels/acre, the soy yield is slightly below last year's record 51.9bushels/acre. Unfortunately, the rise in soy acreage more than offset the slight fall in yields, making for a record 120.4 million tonne harvest, 3% more than last year's previous all-time high of 116.9 million tonnes.
 
Nor is there any relief in sight from South America, where Brazil's projected 108 million tonne harvest and Argentina's expected 57 million tonne crop are each country's second largest soy production volume on record.
 
Last year, the world soy harvest rose a whopping 12%, to 351.2 million tonnes, from 313.7 million the previous year. When America's record crop offset by slight South American harvest reductions, the resulting  2017-18 world soy crop of 348.9 million tonnes has raced too far ahead of consumption.
 
Demand-wise, on one hand, China's anticipated 97 million tonnes of soy 2017-18 soy imports is a healthy 3.8% increase from the previous marketing year's 93 million tonnes. On the other hand, with Chinese import volumes no longer growing at the 10%+ rate taken for granted during the previous decade, its slower rate of import growth is offset by slack demand in the rest of the world: Outside of China, other top importers including the EU (+0.8 million tonnes), Japan (+0.13 million), Mexico (+0.174 million), Vietnam (+0.20 million), Egypt (+0.50 million) and South Korea (-0.01 million) are increasing their soy import volumes by less than 2 million tonnes.
 
This means that over the present and previous marketing years, world soy output jumped 35.2 million tonnes. World soy imports however, increased by just 16.8 million tonnes and the consumption of top three exporters (Brazil, America, Argentina) by less than 3 million tonnes. With the harvest growing nearly twice as quickly as the combined exports and domestic consumption of major suppliers, it is no wonder that bloated soy inventories refuse to fall.
 
From 78.1 million tonnes in 2015-16, they closed 2016-17 at a record 96.3 million tonnes and are on track to rise further, to an all-time high of 97.9 million tonnes by the end of the 2017-18 marketing year. Thus, while corn acreage and inventories have started to adjust themselves to lower demand growth, soy lags responding to price signals.
 
Indeed, from their secular peaks of US$11.20/bushel and US$4.42/bushel in mid-2015, it is surprising to find that corn has fallen 22.6% to US$3.42/bushel -while soy (which is more oversupplied) has declined a far smaller 12.6%, to US$9.78/bushel.
 
Both soy's greater oversupply and its tamer deflation are due to its enjoying a form of market support corn does not have: Livestock growers feed do not feed their animals raw beans but soymeal. With the market for soymeal tighter than that for its bean input, the former has provided soybeans price support in the face of record surpluses.
 
While this has prevented soybeans from suffering the excessive price inflation endured by corn, it also means that while corn inventories are responding to deflationary market signals, soybeans have yet to do so.
 
This past growing season, farmers did corn a favor, switching acres from the golden grain to soy: Truth is, as the attached chart shows, unless soy inventories fall in the steep manner they did from 2007-09 and from 2011-12, this oilseed will do anything but rally. It accelerated the supply adjustment process of corn while postponing it for soy.
 
This implies that from 2018 onwards, feed crop buyers may wish to examine the need for forward hedging feed grains such as corn more carefully than that of oilseed-based inputs, as the latter's cost will stay depressed for a significantly longer period of time.
 


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