November 15, 2018
The USDA trashes its China corn statistics and life goes on - or does it?
China's corn inventory instantly triples, world corn supplies jump 76% --but with Beijing's stockpile walled off from the global trading system, the market barely moves. The huge statistical revision raises serious questions about China's coarse grain imports, longterm market cycles and even their own accuracy.
By Eric J. Brooks
An eFeedLink hot Topic
While November 2018's USDA WASDE report had a lackluster on the daily corn trade, its huge revisions of Chinese corn harvest, consumption and inventory statistics are loaded with long-term implications -both for China and the world corn market too.
The size, suddenness and inherent contradictions within the revised numbers cast a degree of doubt on their overall accuracy (see box article below). Nevertheless, by choosing to conform to a sudden, unexplained revision in China's own monthly agricultural statistics, the USDA profoundly changed world corn supply/demand fundamentals. While it has no impact on short-term prices, the USDA cannot overturn ten years of statistics from the world's second largest corn producer without altering long-term market forecasts –and calling its credibility for providing reliable grain market numbers into question.
On one hand, China's corn consumption remains largely unchanged, with downward revisions to late 20th century feed corn use mostly canceling out higher estimates of post-2010 consumption. Hence, a net 8.8 million tonnes less consumption over 30 years averages out to only 29,000 tonnes less demand per year over three decades. -That is an immaterial sum in a market which consumes 276 million tonnes of corn annually.
On the other hand, the revised consumption statistics have one credible implication: The years since 2015 have seen a rapidly growing, 14 million tonne gap between previous annual Chinese corn consumption estimates and actual demand. That is neither surprising nor controversial: Both the post-2015 gradual liberalization of China's corn market (via lower prices) and more recent ramping up of ethanol production is causing its long-term corn demand growth to accelerate.
The real statistical transformation is within Chinese corn production statistics and their domino-like impact on both domestic and world inventories. Due to the successful protectionist corn policies introduced in 2008, Chinese government statisticians have determined that 296 million additional, previously unaccounted tonnes of corn were grown over the past ten years –and that nearly 30 million tonnes of corn (out of harvests averaging 200 million tonnes+) were not counted every year starting in 2008?
Most of the upward revisions in corn production occurred after 2012, with anywhere from 24 million to 44 million tonnes added to each year's harvest. As a result, China's post-2008 cumulative corn production estimate was revised upwards by 21 times more than its consumption. This has made its current estimated corn inventory volume nearly quadruple.
Under the old USDA figures, inventories were 38.4 million tonnes in 2007-08, peaked at 110.8 million tonnes in 2015-16, fell rapidly to 79.2 million tonnes in the current marketing year –and were on course to dip to 58 million tonnes by the end of 2018-19.
- With the revised USDA and Chinese government statistics, inventories multiplied six-fold, from 36.2 million tonnes in 2007-08 to approximately 223 million tonnes by 2016-17, more than twice the 101.3 million tonne level that was "official" less than a week before this article was published.
In the 2017-18 marketing year that just closed, revised inventories stayed stubbornly near 223 million tonnes for a second consecutive growing season, whereas they had fallen steeply to 79.2 million tonnes under the old statistical series. Going forward, corn inventories projected to fall to 58 million tonnes just a few days ago are now expected to close out 2018-19 at the whopping 207 million tonne level.
Hence, this statistical revision blows China's corn stocks-to-use ratios out of the water: From 48.4% in 2015-16, China's corn stocks-to-use ratio had closed 2017-18 at 30.1% and entered Q4 2019 at 21.0%. Under the revised figures, 2015-16's peak stocks-to-use ratio of 92.6% only fell to 84.6% this year and will close out 2018-19 at a sky-high 75.2%.
Even under the previous more conservative estimates, China accounted for 40.8% of 2017-18 world corn inventories. With new production figures multiplying domestic supplies, China now accounts for an overwhelming 65% of world corn inventories –and superficially wrecks long cherished corn market fundamentals.
From an already high 194.2 million tonnes, closing 2017-18 corn inventories are suddenly jacked up to a sky-high 340.915 million tonnes, itself down a marginal 2.7% from the previous year's now record 350.268 million tonnes. -Instead of falling below 140 million tonnes by 2020, the world now has a quantity of corn in storage nearly equal to what China and Brazil grow in a single year.
With the world corn stocks-to-use ratio previously on track to fall from 2016-17's 22.0% to this year's 18.5% and 14.4% in 2018-19, the market had been pointing towards a possible H2 2019 market rally. Now, with the revised 2016-17 stocks-to-use ratio of 33.4% inching down to 27.4% by the end of 2018-19, the world corn market is as grossly oversupplied as that for soybeans –or is it?
From an agricultural commodity perspective, the major difference between corn and soy is their role in international trade. 42% of all soybeans are traded internationally and approximately 60% of raw bean exports are purchased by China. By comparison, only 15% of corn is exported and with Beijing's formidable import barriers means that only 3% of this volume is imported by China.
--Moreover, even with inventories at record highs, China considers corn a strategic commodity and will not allow it to be exported. That is fortunate for the world's corn growers, as it prevents the world market from feeling the full deflationary pressure of China's massive corn surplus.
Emily French, founder and CEO of Cosiliagra has long maintained that thanks to Beijing's trade barriers, the world corn market operates independently of China. Instead of needing to commence mass corn import volumes exceeding ten million tonnes, this huge, newly revised inventory level means that China will be able to operate independently of the world corn market for possibly another five years.
–Even so, Beijing's gradual corn market liberalization and rising ethanol production imply that sooner or later, that day will come. The day and year China lights a fire under the world corn market and begins mass corn imports very much depends on the accuracy of this statistical revision.
Consequently, when China is factored out of the world corn market, we see the continuation of a longstanding post year 2000 secular trend: Prior to 2000, the world corn market minus China operated with average stocks-to-use ratios in excess of 20%. Due to the high proportion of corn now turned into ethanol, the world market minus China has seen its post-2000 stocks-to-use ratio fluctuate in the range of 9% to 17%: Corn price rallies usually occur when it falls below 13%.
Based on revised USDA statistics, the world (minus China) corn stocks-to-use ratio is on course to fall to 11.8% by the end of the current marketing year, which ends at the start of Q4 2019. This is in the same lower range that sparked that every corn market rally since 2000 and implies that a cyclical corn market upturn will begin after 2020.
Of course, while the world corn market is still on track to turn upwards early in the next decade, factors as diverse as bad weather or a global liquidity crisis can still push the date forward or backward. China's statistical revision merely adds another layer of complexity to date and timing of impending events –and trashes the entire narrative told both by analysts and even China's own government.
Based on the previous statistical estimates, the 2015 corn market liberalization and Beijing's stated intention to convert a large proportion of stockpiled corn into ethanol, it was believed that Chinese inventories would fall low enough to commence mass corn import reliance in the early 2020s. That would have coincided with the tightening of world non-Chinese corn supplies, and had the potential to spark a strong, long market boom.
If this statistical revision is indeed accurate, then China's entry and full integration into the world corn market have probably been delayed by five years. That means that the world corn market (minus China) is still projected to experience a price upturn within 1.0 to 1.5 years, though it will not be as strong as it would have been had China's corn inventory numbers stayed the same.
Assuming this statistical revision is accurate (see box article below), the mid-2020s would finally see China enter the world corn market -and when it does, China's full integration into the world corn trade will significantly inflate corn prices. Hence, the statistical revision implies that in place of a large corn market rally in the early 2020s, there will be two smaller but still significant rallies.
For now, the most important thing we can do is to carefully observe China's market behavior. Its past sourcing of coarse grains contradicts this upward revision in corn production statistics. Will its future coarse grain market buying do so as well? Only time will tell.
Casting doubt on the USDA's statistical revision
Huge upward revisions in Chinese corn supplies are contradicted by high, unchanged coarse grain import volumes.
By Eric J. Brooks
Can this massive revision of Chinese corn supply statistics even to be trusted? For several years running, officials from China's China National Grain and Oils Information Center (CNGOIC) stated at industry conferences that China substituted imports of coarse grains such as sorghum, DDGS, oats and feed wheat to avoid buying foreign corn. Now, the same agency suddenly claims that China had considerably more corn than it needs.
This leads to the following dilemma: According to the revised statistics announced by CNGOIC (and adopted by the USDA), China's corn harvest surplus (harvest minus consumption) skyrocketed from 8.1 million tonnes in 2008-09 to 43.8 million tonnes in 2014-15. If this is true, then why did coarse grain imports skyrocket from a little over 2 million tonnes in 2009 to approximately 16 million tonnes in 2014 –in a year when China allegedly harvested 39.5 million tonnes more corn than it needed for feeding its livestock?
Under the revised statistics, China's imports of sorghum and oats used in feed increased by a factor of 24 even as its corn surplus supposedly grew by leaps and bounds.
This of course, does not mean that the previous statistical estimates were more accurate. It could mean that the new figures overestimate Chinese corn supplies as much as the old statistical series underestimated them. At the very least, the new numbers appear to contradict the statements of CNGOIC representatives, who stated at conferences that China was substituting coarse grain imports in place of corn.
Whatever the actual volume of China's corn supply, the truth will come out via the behavior of its grain traders in the open market. Watch closely in coming months if China's coarse grain purchases (or lack thereof) are in agreement with such an official abundance of corn.
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