February 13, 2015
A year of soft feed crop prices ahead?
Corn has bottomed out but has no reason to climb back to its earlier height, while soy is an oversupplied capstone to a bloated oilseed market.
By Eric J. BROOKS
An eFeedLink Exclusive Commentary
Having deflated for over two years, there's nothing on the horizon that can lift feed crops from the market bottoms they have repeatedly tested since the middle of last year. However, while corn looks challenged by the US$4/bushel resistance point, soy could fall quite significantly from its current US$9.60/bushel to US$9.90/bushel trading range.
Corn: Weak, but not getting much weaker
With crude oil price rebounding by over 25% from the lows they set in early January and corn staying relatively constant, widening ethanol profit margins partly reversed the latter's recent production downturn. It forced the USDA to revise upwards its estimate of corn used for ethanol fermentation by 1.91 million tonnes. With feed corn consumption only cut 0.64 tonnes and the harvest already in, closing inventories were slashed 1.27 million tonnes, to 46.42 million tonnes.
On one hand, this puts American corn inventories 122% higher than the mere 20.9 million tonnes they bottomed out at during 2012-13's drought year. It also puts them a healthy 48% above their 31.3 million tonne 2013-14 closing volume.
On the other hand, while this inventory volume is comparable to that of good harvest years, the US stocks-to-use ratio is much lower than when inventories exceeded 40 million tonnes during the late 20th century. At one time, a close out of 45 million tonnes could push the stocks to use ratio up to 25% or higher.
Even in the early 2000s, closing inventories of 45 to 50 million tonnes resulted in closing stocks-to-use ratios around 17% to 19%. This time, a closing inventory of 46.4 million tonnes gives us a stocks-to-use ratio of just 13.4%. That is just slightly higher than the 12.8% ratio which closed out the inflationary 2007-08 marketing year.
Fortunately, corn inventories are much higher in the rest of the world than they were back then. Moreover, the expansion of Brazilian and Black Sea supplies means that the US now accounts for 38% of world corn exports, versus 45% to 60% in the first decade of this century. This means that a US corn stocks-to-use ratio of around 13% does not light a fire under prices the way it once did. Alongside a record American corn harvest and a healthy, near record Chinese harvest, it leaves very little reason for buyers to bid up prices at this time.
On one hand, while corn's cost appears to be well under control, recent reductions in planted area in the US and elsewhere imply that its supply fundamentals are tightening up. Moreover, while falling energy costs are lowering its break-even point, it cannot fall too much lower, given the acreage lost to other crops.
Soy, oilseeds look very weak
On the other hand, much darker deflationary clouds loom over the soy market. After a whopping 108 million tonne US harvest, the USDA cut back Brazil's soy harvest estimate to a still very large 94.5 million tonnes, a figure virtually identical to the Brazilian government's, which forecasts 94.6 million tonnes. These exceed Brazil's old record by nearly eight million tonnes or 9%.
Furthermore, while higher than anticipated rates of domestic crushing and export shipments slashed projected US soy inventories from nearly 13 million tonnes in late 2014 to a very modest 10.5 million, this modest reduction is being swamped by the bloating of Latin American supplies.
In particular, Brazil's soy inventories are rising by nearly 8 million tonnes or 42%, from 16.8 million to 24.0 million tonnes. To this must be added Argentina's 19.7% soy inventory increase, from 29.0 million to 34.7 million tonnes. Latin America's collective 60 million tonnes of closing soy inventories is up 31.1% from a year ago and pushing world soy inventories to a record 89.3 million tonnes, up from 66.3 million at the close of 2013-14.
With soy supplies turning into a glut, there is not much help from demand side fundamentals. At slightly under 83% of world inventories, China's anticipated import volume is below the 90% threshold where it can boost soy prices. Should its economy turn down, this figure may fall below the 80% threshold that implies serious soy market deflation ahead.
Nor is soy getting any help from other parts of the oilseed complex. Since peaking at RM2,390/tonne (US$666/tonne) on excessively rainy weather at the turn of the year, palm oil has come under increasing pressure, both from its own fundamentals, and that of competing oilseeds.
With regards to its own fundamentals, falling oil prices have undercut biodiesel production forecasts, which had become an important domestic driver of palm oil demand in recent years. Even before late 2014's inclement weather raised hopes of a supply-side reduction, inventories were becoming badly bloated. Now, with growing conditions reverting to normal and biofuel demand falling, DBS Bank reported that it expected palm market share to be lost to soy oil.
Chronic palm oversupply developing
As if to confirm this prognosis, Malaysia's government reported that in January, palm oil exports fell by 22% from December volumes, the greatest decline in seven years. The market share loss's impact on inventories will only get worse when Indonesia's harvest coming in: The USDA expects it to rise 8.2%, from last marketing year's 30.5 million tonnes to 33 million this year. With Malaysia's production expected to rise 5%, the combined closing inventories of these leading palm producers will total a record, USDA estimated 5.86 million tonnes, with Indonesia accounting for 2.89 million tonnes of this sum.
This surplus does more than trounce the previous, 4.9 million tonne palm oil inventory record set just last year: Before 2010, Indonesian palm oil inventories only exceeded a million tonnes on one occasion; in 2006. After exceeding 1.45 million tonnes in 2011, Indonesia's palm oil inventories kept growing and managed to double even in the face of rising biodiesel production, which has now gone into recession.
Similarly, Malaysia never had inventories over a million tonnes before the late 1990s, but has seen its surpluses stuck above 2 million tonnes almost continually since 2010.
Soy and palm's synergistic oversupply woes are combined by that of oilseeds that grow in colder climates. Far away from the equator, combined Canadian and Australian rapeseed inventories are climbing down from their mid 2014 peaks, but will still close the 2014-15 marketing year at twice their level of five years ago, and at historically high levels.
In sum, amid inadequate Chinese demand soy and palm oil inventories at stand at record levels and rapeseed supplies are also at historically high volumes. The situation is such that the entire oilseed complex's price fundamentals threatens could collapse under the weight of its collective oversupply.
While corn's fundamentals are weak, it has at least bottomed out. Current imbalances between supply and demand imply that most oilseeds need to further reduce their acreage before their bear market can end. Barring any bullish bad weather, that implies that prices of soy, palm and rapeseed must fall further before they can climb back up.
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