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November 11, 2015
A postponed feed crop market recovery
Bumper US crop harvests and a whopping upward adjustment in Chinese corn inventories portend another year of low feed crop prices ahead.
An eFeedLink Exclusive Commentary
The last half year has seen us consistently state that while both grains and oilseed prices were to remain depressed, the corn market was much closer to a market upturn than soy. Now however, serious revisions to American and Chinese crop numbers have postponed any market recovery for both feed grains and oilseeds.

Instead of corn growing productivity in the 164-166bushel/acre range expected by analysts, good weather at the end of the growing season pushed its crop yield to 169.3bushels/acre. This was a mere 1% below last year's record 171bushels/acre and above its long-term growth path. At 346.82 million tonnes, that makes this year's US corn harvest the third largest on record behind last year's 361.09 million and 2013's 351 million. 
Corn turns bearish for a few more quarters
All this brought corn to below US$3.60/bushel and its lowest trading level since mid-summer, when Greek and Chinese financial crises took turns deflating the market. This time however, instead of short-term monetary squeeze, both domestic and foreign corn market fundamentals promise to keep prices deflated over at least the medium term.
On one hand, with cheaper sorghum being used in place of corn for ethanol production, US domestic corn consumption was revised downwards 1.27 million tonnes. Similarly, the deflated real and high US dollar are pricing US corn exports out of the world market, as countries switch to cheaper Brazilian and Argentine supplies. That resulted in the USDA cutting 2015-16 US corn export estimates by 1.28 million tonnes, from 47 million tonnes to 45.72 million. Moreover, with US corn exports running significantly behind their volume at in the same period of 2014, there is a rising chance that the export total could fall to below 44 million tonnes.
When combined with upward revisions in corn harvest size, the 2.5 million tonne drop in demand for US corn is resulting in a gross oversupply situation. Estimated closing inventories were boosted a whopping 12.7% or 5.04 million tonnes, from 39.66 million to 44.70 million tonnes. –By comparison, Bloomberg's survey of analysts had expected inventories to rise by only a million tonnes.
As a result, the US closing corn-stocks-to-use ratio had previously been at 11%, with the hope that its somewhat low level would counterbalance higher inventories levels in the rest of the world. Now however, American inventories look set to have a stocks-to-use ratio of 13% or higher.
Huge China oversupply sits on corn market
This was very bad news, as corn's oversupply situation deteriorated by even more in the rest of the world: For months, there has been talk of how China's disappointingly low corn import volumes implies that its corn inventories must be larger than was estimated.
The UN FAO had earlier in the year revised its China corn inventory estimates upward 15% to 94.5 million tonnes, but even this amount turns out to be too conservative. November saw the USDA conclude that alongside unusually low livestock inventories, China's corn demand has also been depressed by much greater substitution of wheat and sorghum than was initially estimated.
As a result, while China's corn harvest of 225 million tonnes is up 4.4% on 2014's 215.6 million, inventories have been radically revised upwards: Instead of 81.7 million tonnes, 2015-16's opening inventory is now estimated at 100.5 million tonnes. Instead of 91.1 million tonnes, 2015-16's closing inventories are now expected to total a record 114.4 million tonnes –and China's closing stocks-to-use ratio will be a seriously bloated 53.5%.
Consequently, even though China keeps its corn inventories off the world market, such bloated inventories in the world's largest feed producer have completely changed the world corn market's fundamentals. Instead of falling back to 187.8 million tonnes as forecast a few months back, 2015-16 closing corn inventories are now forecast to rise a whopping 24.1 million tonnes or 13%, to a record 211.9 million tonnes.
Previously, the world corn market's closing stocks-to-use ratio had risen from 18% in 2013-14 to 21.3% this year –but was on track to fall to approximately 19% in 2015-16. –Consequently, instead of falling back slightly, the revision to China's corn inventory and the smaller but still significant upgrade to US supplies means that corn's world stocks-to-use ratio will peak at around 22% in 2015-16.
Moreover, with El Nino skewing the Latin American corn harvest probabilities in favour of moister weather and larger-than-expected crops, there is every reason to believe that world corn inventory estimates could rise even further before they begin their postponed downturn.
According to Morgan Stanley, the marginal break-even-cost of expanding US corn acreage in Q1 2016's new growing season will be US$4.25/bushel. –However, with corn trading closer to US$3.50/bushel and world inventories at all-time highs, the only logical market outcome is for corn to trade below US$4.25/bushel until reduced acreage forces world cuts inventories by at least 40 million tonnes or 20% below their projected 211.9 million tonne level. Unfortunately, with developing country meat demand tapering off amid a world economic slowdown, that could take quite some time.
Surprise record soy harvest
While corn's unexpected abundance has made its medium term forecast more bearish, this was also true of soy. While soy's oversupply exceeds that of corn, even six months ago, it was thought that the US crop would total about 100 million tonnes, about 5% below last year's record harvest. Instead, while acreage was down markedly from a year ago, this was offset by a record soy crop yield of 48.3bushels/acre. Consequently, the USDA made a surprisingly large upgrade to this year's harvest –and at 108.4 million tonnes, it even breaks last year's 107 million tonne record –which itself was a quantum leap from the previous 91 million tonne record.
On one hand, with exports revised upwards by 1.1 million tonnes or 2.4% to 46.7 million tonnes and production in several countries nominally falling, world soy inventories –unlike corn– saw their closing 2015-16 level fall slightly, from 85.1 to 82.5 million tonnes.
On the other hand, at 26.4%, soy inventories remain more bloated than those of corn. More to the point, the US will dominate soy exports for the next five months and now has the highest inventories in nine years. With the US dollar making its bloated soy supplies expensive, the record US harvest will work to keep soy prices below US$8.50/bushel and possibly force them to touch US$8.00/bushel, over the next two quarters. Moreover, should El Nino bring excessive rainfall to South America's crop growing regions, the USDA may be forced to boot world soy inventories beyond their previous highs before the end of the fourth quarter.
All this implies that while it is a great time for livestock farms to stock up on cheap, plentiful feed crops, the prognosis remains downbeat for corn and soy. The former's market recovery has been postponed by six months to a year. Already more depressed than feed grains, soy's recovery is not just slower than that of corn but could suffer further setbacks when South American crop forecasts come in.
It might be advisable that for risk minimization purposes, it is in the best interest of feed crop farms to sell their corn, soy and wheat harvests over the next two quarters.

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