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December 15, 2017
 
When no news is not good news: A blasé year-end USDA report puts deflationary weight on feed crops
 
In an oversupplied market, a lack of significant news exerts downward price pressure, especially on beans.
 
By Eric J. Brooks
 
An eFeedLink Hot Topic
 
 
It is a commodity market rule that in the absence of any new, significant information, prices drift downwards. That is even truer in a chronically oversupplied market. 2017's last USDA WASDE report did not report much that was new or significant. The market immediately reacted in classic end-of-year commodity bear market fashion: Investors seeking to clear their books for 2017 sold off feed crop futures that were obviously going nowhere en masse.
 
CBOT Corn, which traded as high US$4.14 on mid-July drought concerns fell as low as US$3.35/bushel before rebounding to a near US$3.50/bushel market bottom. Soybeans traded as high as US$10.48/bushel during the anxious US growing season. Within two days of the USDA report's release, they fell from near US$10.00/bushel to a low of US$9.66/bushel.
 
By ten days before Christmas, corn was trading 15.5% below its mid-year peak; soy sold for 7.8% below its Q3 high. We will see that unlike corn which appears stable fluctuating near US$3.50/bushel, beans may yet fall even further.
 
Corn supply-demand fundamentals were virtually unchanged across all major production and importing regions. On the supply-side, America's corn harvest estimate held steady at 370.3 million tonnes. Argentina (42 million tonnes), Brazil (95 million tonnes) and Ukraine (25 million tonnes) also saw their harvest projections remain constant.
 
America's high domestic ethanol demand cut its corn inventory estimate from 63 to 62 million tonnes. On a global market scale, this nominal inventory downgrade had an immaterial impact: Closing 2017-18 world corn inventories stayed unchanged near 204 million tonnes.
 
On one hand, that is still an 11.4% improvement over last marketing year's record 227.3 million tonne world corn inventory. On the other hand, the resulting 19% world corn stocks-to-use ratio implies at best a stagnant market and flat prices. With prices already close to farming break-even levels, it would be difficult to push CBOT corn too far below the US$3.50/bushel for an extended period of time or move them more than 5% above or below this point.
 
 - Only a Q1 2018 upset to South America's weather or shipping difficulties at Brazilian ports could change that forecast. The resulting change in market sentiment could be augmented by the low trading volumes that occur early in the year. Even then, it would only result in a short-term price bounce based more on market anxiety rather than real fundamentals.
 
Demand-wise, the projected import volumes of leading corn buyers including Mexico (16.5 million tonnes) EU (16.0 million), Japan (15 million), ASEAN (14.2 million) and South Korea (9.7 million) stayed unchanged from last month's levels. Moreover, as the accompanying graph clearly shows, after growing aggressively for the better part of a decade, total world imports have leveled out over the last few years.
 
But there is one very distant but bullish demand stimulant on the horizon: Having peaked at 224.6 million tonnes two years ago, China's corn harvest is expected to be closer to 216 million tonnes rather than the 215 million initially forecast. Its closing corn inventory and stocks-to-use ratio are still forecast at a very high 79 million tonnes and 32.9% respectively.
 
Outside of China, the corn stocks-to-use ratio in the rest of the world is a near-bullish 15%: If China's ongoing market liberalization reduces its corn stockpile, that alone would be enough to send corn well north of US$4.00/bushel.
 
With that in mind, China's corn demand has risen at an annual 4.8% annual rate over the past ten years. Thanks to China's new government-sponsored push into ethanol production, 2016-17 corn consumption jumped 6.6% over the previous year, to 232.0 million tonnes, from 217.5 million in the previous year. Going forward, 2017-18 corn consumption will rise to 240 million tonnes.
 
With imports forecast at 3 million tonnes or less, this will cause China's corn inventories to fall by 20 to 25 million tonnes annually -until it is forced to import corn en masse and possibly start the next grain bull market- but not for at least another two to three years.
 
While the lack of news was enough to keep corn price near their market bottom, soybeans may have further to fall. After rising from 77.9 million tonnes in the 2015-16 growing season to a record 96.2 million tonnes in 2015-16, all hopes that world bean inventories would begin to fall have been dashed.
 
Several months ago, it was believed that US drought conditions could reduce its crop by five to ten million tonnes -and bring world inventories to below 90 million tonnes. Instead, a record 120.4 million tonnes US soy harvest boosted world 2017-18 world soy inventory estimate to a new record of 97.9 million tonnes.
 
Just before publication came news that after threatening dry conditions, Argentina's crop was benefitting from recent, better-than-expected rainfall. On one hand, that makes it more likely that the USDA's world soy inventory estimate will climb over 100 million tonnes in months to come.
 
On the other hand, today's adequate rains are no guarantee that good Brazilian and Argentine crop growing conditions will persist: Indeed, with sea surface temperatures in the equatorial East Pacific Ocean more than 0.5C below normal, the tendency for an La Niña event (and Latin American drought) in early 2018 is higher than normal.

Soy's problem however, is two-fold: First, like corn, the USDA report hardly changed soy harvest, consumption or inventory estimates. Second, in the absence of bullish news, soy remains in a far worse oversupply situation than corn -and unless dry, La Niña-induced weather to prevent inventories from topping 100 million tonnes in months to come.
 
At this time, beans' only bright spot has been China. From 83.5 million tonnes of soy imports in 2015-16 and 93.5 million imports in 2016-17, China is expected to import 97.0 million tonnes of soy in 2017-18. That's a better-than-expected 16.2% rise in Chinese soy import volumes in just two years. The problem is that with China already buying 65% of the world's soybean imports, it cannot single-handily hold up the sky -and longer-term soybean import growth has far lagged harvest growth in the rest of the world.
  
From 313.8 million tonnes in 2015-16, the world soy harvest is on track to total 348.9 million tonnes this year, a 35.1 million tonne, 11.1% increase. Over these same two years, world soy consumption rose only 30.6 million tonnes or 9.9%, from 314.4 to 345.0 million tonnes.
 
Today's soy bear market began when production exceeded world consumption by 12 million tonnes in 2013-14. It turned sharply downwards when harvests outraced world demand by a whopping 22 million tonnes in 2014-15.
 
The 2015-16 marketing year provided a glimmer of hope, as consumption finally exceeded supply that year -though by less than a million tonnes. Unfortunately, 2016-17 saw soy production again exceed consumption; this time by 21.6 million tonnes. More of the same is projected for 2017-18: Unless a strong La Niña and/or a US drought breaks the back of world soy production, this year will see production outrace consumption by nearly 4 million tonnes.
 
Moreover, after falling by 55% against the US dollar from 2013 through 2016, the past 1.5 years saw Brazil's climb to 33% below its previous level. Unfortunately, a new political crisis in that country has made Brazil's currency decline. This is sparking concern that Brazil will boost soy exports to balance its trade with the world. That naturally puts more downward price pressure on soy.
 
The more important point however is that unlike corn, soy has yet to see consumption grow faster than production; has yet to see anything in the way of a meaningful world inventory reduction. Hence, while the USDA report was one of very little new news, soy's fundamentals look increasingly bearish relative to that of corn.
 
Hence, unless the weather profoundly disrupts Latin America's crop growing season, soy, corn and their feed input substitutes appear to have a dull, flat winter market ahead of them. It is a good time to be a livestock farmer, with very little need to hedge against the risk of future price increases.
 
Curiously, even though soy is under more deflationary price pressure, an La Niña-induced Latin drought would give it more short-term upward price potential but make no mistake: Beans remain under very intense long-term, downward price pressure.
 


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