December 14, 2018
Corn forms a floor, with nowhere to go but up in 2019
Both by trend analysis and on the basis of supply demand balances, corn is due to turn up. Monetary conditions can delay the day but not even revised Chinese corn statistics can stop it from happening.
By Eric J. Brooks
An eFeedLink Hot Topic
Within America's corn belt, a lack of news depressed prices as of late –but that's not unusual during market bottoms. Based on December's USDA report, at 371.5 million tonnes, the US corn harvest estimate was left unchanged, as was feed corn consumption at 139.7 million tonnes.
With ethanol and corn processing demand coming in 1.3 million tonnes lower than expected, US corn inventories were boosted from 44.1 to 45.3 million tonnes and America's stocks-to-use ratio to a modest 14.1%. However, with America now supplying less than 40% of exports (compared to its traditional 55% to 70% traditional market share), the world corn-stocks-to-use ratio is quite another story.
On one hand, with both the USDA and China's government revising the latter's corn statistics, world inventories have nearly doubled and a projected 2018-19 14.4% world stocks-to-use is now a whopping 27.5%.
On the other hand, China's protectionist laws have always walled off its corn inventory from the world market and despite recent moves towards grain market liberalization, this continues to be the case.
–When one excludes Chinese inventories and consumption from global corn statistics, the world stocks-to-use ratio falls from 2017-18's 14.3% to 11.9%. How does this ex-China world corn stock volume compare to its level in previous market rallies?
The closing (post August 31st) world corn stocks-to-use ratio (excluding China) fell to slightly over 12% in 2003-04 and 2006-07, but corn only rallied to record levels in the year following 2006-07, when it was pulled up by a combination of soybean price inflation, lousy harvests and aggressive monetary expansion of global liquidity. Interestingly, in 2008-09, even with the excluding China world stocks-to-use ratio still under 15%, a severe global liquidity contraction pulled crashed corn's price by 60% from record levels in a matter of months, as was the case with many other commodities.
After 2009, it fell steeply into the 10% to 11% range, where it stayed from late 2010 through early 2012, amid ample rapid world monetary growth and strong corn market rallies into the US$5.00/bushel to US$6.50/bushel range. Amid record-setting US ethanol output and commodity markets made frothy by excessive monetary expansion, corn set a new record price in H2 2012. This roughly coincided with the 2012-13 world corn stocks-to-use ratio (excluding China) bottoming out at 9.8%.
Thereafter, with US ethanol output flattening out and harvests racing ahead of demand, not even ample liquidity could save corn from a downturn that saw it fall 60% from its 2012 record high, to near US$3.20/bushel.
Despite the recent improvement in excluding China stocks-to-use ratios, the last five years have exhibited classic bear market behavior –and that's where the good news is too. Since 2014, each seasonal corn price peak has been lower than the previous years –but every seasonal market bottom has also been higher than the previous low. Needless to say, the point where the spread between seasonal price highs and lows becomes insignificantly small usually marks the start of a new price cycle.
As the graph below shows, based on such trend analysis, corn's new market upcycle is due to commence next year –theoretically, it could even have started this year but the lower price bound has risen slowly due to current, tightening monetary conditions.
Nevertheless, like all upward market cycles, it will involve a succession of consecutively higher price highs and lows. Given the walls that exist between China and the world market, it is unlikely to exert a deflationary influence over the short term. By the time China fully liberalizes its corn market in the mid-2020s, its large corn stockpile should be dwindling due to rising feed and ethanol consumption.
Conclusion? 2019 will see a slight rebound in both corn price highs and lows, but you can sit out the year: The real action in corn is from 2020 onwards, as the world corn stocks-to-use ratio must go through one to two more cycles before bottoming out below 10% --and from an inflation perspective, it would be best if this coincided with a new era of global monetary expansion.
Provided world liquidity does not undergo a traumatic tightening. The next six months are ok for market bottom investing. Should a tightening of world liquidity cause a dramatic price fall in economic and market activity, the subsequent reflation would be the first excellent investing opportunity for the next corn cycle's first upward leg.
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