January 27, 2017
Low feed costs and a crop bear market that just won't quit
An eFeedLink Hot Topic 
  • Due to a combination of unusual circumstances, corn production increased by 19% and soybean output by 26% over the four years feed crop bear market
  • Unusually high harvest growth caused forecasts corn and soy inventory declines to turn into further supply increases
  • Price support from a tight meal market made for better soy bear market returns but more bloated inventories, a slower bottoming out of fundamentals
  • Feed mills and livestock farms will enjoy low feed costs through to the end of this decade
Feed mills will be glad to know that as we enter the feed crop bear market's fifth year, there appears be no prospect of any market upturn. While one-off events like last year's artificial Brazilian corn shortage can provide short-term support or spark marginal bear market rallies, circumstances make it likely that corn will stay low for several more years and soy perhaps an even longer time.
As is always the case with feed crops, current market conditions are the paradoxical outcome of the recent past. In corn's case, for over a decade, more than the entire increase in US corn yields was diverted into ethanol production. While USs biofuel's output has now stabilized, ethanol refineries continue to eat up nearly a third of America's corn crop, making 120 million tonnes of it unavailable for export.
The high returns generated by the 2002-12 ethanol boom boosted returns high enough to bring frontier regions in Latin America, Russia and Ukraine into production. In Brazil, Argentina and Ukraine, their economic crises crashed the country's currency.

This had the odd effect of boosting Ukrainian, Argentine and Brazilian corn growing returns even as CBOT corn futures fell over 55%, from US$8.40/bushel in 2013-13 to an average of near US$3.50/bushel for most of the last three years. To make matters worse, after several flat years, US corn yields started to increase, but after 2012, there was no rise in ethanol production to absorb the extra output.
With currency deflation and biofuel output defying market signals, from 2012-13 (when the market peaked) through to the close of the 2016-17 marketing year, world corn production expanded by 19.3% in total and at a whopping 4.5% annual rate –in the face of a 55% price decline over this time.
This perversely defied the expectations of analysts, who had predicted corn inventories to start declining from 2014 onwards. Instead of peaking in the 175to 180 million tonne range as was expected, they jumped another whopping 20% over two years, and are expected to close the current marketing year in late August at nearly 221 million tonnes.
Consequently, as corn crashed from 2012 through 2014, its stocks-to-use ratio climbed from the 14% to 15% level that triggered feed hyperinflation into the 18.5% range. With Brazilian, Ukrainian and Argentine hard currency windfalls keeping return artificially high, the ratio then climbed to around 21.5%. Henceforth, despite poor, falling returns in major production countries like America and China, corn's world stocks-to-use will enter the 2017-18 stuck around a bloated 21.5% for a third consecutive year.
A similar, though partly mitigated oversupply dogs the world market for soybeans. Pulled along by China's reinvention of the world soybean import market, an oversupply situation occurred here too. Record prices in the late 2000s and an even higher, drought-induced price peak in 2012-13 induced a huge expansion of soy crop growing area in Latin America, particularly Brazil.
After 2011, a succession of catastrophic swine and poultry disease outbreaks and subsequent economic slowdown made China's once fast growing feed demand decline and stay level for five years. With China buying approximately 60% of world soy exports, its decelerating oilseed demand growth coincided with the above-mentioned surge in soy production
As a result, from 20% in 2012-13, soybean's world stocks-to-use ratio climbed to 25.9% in 2013-14. Everyone expected that soybean inventories, like those of corn, would begin declining thereafter.

This did not occur for two reasons. First, as was the case with corn, a 60% decline in Brazil's currency allowed windfall foreign currency earnings to more than offset a 50% decline in soybean futures. However, when corn and wheat's price fell by more than that of soy, many American farmers switched crop acreage from feed grains to soybeans.
Consequently, from 2011 through 2014, China's slowing soy import growth bloated world inventories. Then, from 2014 onwards, expanding US soy acreage and crops made inventories rise higher, rather than fall as anticipated. Thus, after peaking at 25.9%, the soybean stocks-to-use ratio fell back to 24.5% in 2015-16. Now, with expanded US acreage bloating supplies, it will close 2016-17 by rebounding to 25%.
Ironically, soy also enjoys a source of price support which will make its downward inventory adjustment slower than that of corn: A worldwide shortfall of soybean crushing. Whereas the stocks to use ratio of beans has jumped markedly, stocks of actual crushed soymeal are tighter today than they were during the soybean price boom.
From 2012-13 through the end of 2016-17, world soymeal consumption increased five times faster than inventories. Over this time, soymeal demand jumped 26.7%, from 177.6 to 225.1 million tonnes. –Soymeal inventories by comparison, increased a mere 5.3% from 9.89 to 10.41 million tonnes.
The resulting decline in the world soymeal stocks-to-use ratio from 6.5% in 2014-15 (when soybean prices crashed) to 4.6% at the end of the 2016-17 marketing year makes for an artificial sort of market tightness: Even though, the world is more awash than ever in raw soybeans soymeal's stocks-to-use ratio is lower today (4.6%) than they were during the 2007-08 (4.8%) or 2012-13 (5.6%) oilseed market rallies.
While this is giving soybean farmers unusually good returns in the market's bear phase, the resulting excess production is also keeping soy inventories artificially higher and more bloated than those of corn. Hence, while corn production increased by 19.3% since its 2012-13 price peak, soymeal's strong fundamentals made bean production rise an even faster 25.8% over this time. The resulting faster rise in soy production and more bloated inventories means that while beans have better bear market returns, they will stay depressed in price longer than corn too.
All this is good news for feed mills and livestock farms. After suffering below average returns for most of the 2000s and early 2010s, they will be blessed by low feed costs going into 2020 and perhaps beyond. In fact, it is due to the simultaneous rise in red meat prices and falling feed costs that 2016 saw world feed production rise at its fastest rate since the early 2010s.
Although production of feed-intensive red meat is showing the most promising growth fundamentals seen in decades, it will take at least three to five years before low prices and below-trend harvests can spark a new, genuine feed crop market rally.

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