March 4, 2020
Corn, soybeans, ASF, coronavirus – and the damage done
Human and animal diseases are slashing world meat consumption estimates but having less of an impact on feed crop supplies. Strangely, the more these diseases depress feed crop markets, the faster the next rally will arrive.
By Eric J. Brooks
An eFeedLink Hot Topic
Going into the now global coronavirus crisis, corn inventories were headed in the right direction, preparing for the next rallies. From 118.75 million tonnes and a 14.4% stocks to use ratio in 2017-18, world corn inventories (excluding China's partly walled off-market), to 110.15 million tonnes and 12.7% in 2018-19. With South America's corn harvest now being loaded for export, inventories are on track to drop another 12.38 million tonnes, for 2019-20 to close out at 97.77 million tonnes and an 11.4% stocks-to-use ratio.
The problem is that when China is added to the equation, world corn stocks go from 341.3 million tonnes in 2017-18 to 296.8 million tonnes in our current 2019-20 marketing year. This, in turn, moves the world stocks-to-use ratio downtrending but bloated, from 33% in 2016-17, it fell back to 28.0% in 2018-19 and is on track to finish to close our current 2019-20 marketing year at a still very high 26.1%.
According to Alltech's Global Feed Survey, world swine feed production fell by 11.1% or 32.3 million tonnes in 2019. Assuming a 55% corn inclusion rate in Asian swine feed, that implies that had ASF not broken out, 2019-20 closing world corn inventories would be at least 17.76 million tonnes lower than current projections, with 15 million tonnes of the additional inventory carry-over being in China, 2.76 million tonnes in other Asian nations.
This means that without ASF breaking out the 2019-20 closing world corn stocks to use ratio would be 24.2% instead of 26.1%. Excluding China, the world corn-stocks-to-use ratio would be 11.1% instead of 11.4%.
Two factors account for ASF's minimal impact on world corn inventories. First, while it profoundly devastated swine feed demand in pork importing markets, ASF had no impact at all on the swine feed demand of pork exporting countries –the latter having a greater impact on feed costs than the pork importing nations.
Second, ASF itself stimulated the production of poultry meat in Asia and of pork in exporting countries, as China, Vietnam, and the Philippines collectively boosted their pork imports by more than two million tonnes. The resulting higher poultry feed production in Asia and swine feed milling in pork exporting North and South America offset some of the corn feed demand losses in China and Southeast Asia.
Interestingly, ASF did not hold back the world corn market (excluding China) too much from its slow inventory decline and return to eventual balance. When China is included in the calculations and we assume ASF never happened, the resulting 24% world-corn-stocks to use ratio does not accelerate the world corn market's gradual running down of accumulated surpluses by more than a few months.
A similar story -with a three-year lag– can be told for soybeans. Whereas corn's mid-2010s deflation slashed returns enough to make inventories decline after 2016, this is not the case with soybeans: First due to unexpectedly strong farming returns and bumper harvests, later due to the trade war, an anticipated fall in soybean inventories never materialized after 2017. 2019-20 will be the first soybean inventory decline since 2012; it will be the third year of falling corn inventories.
Soy's stocks-to-use ratio is falling from last year's 32% to 28% this year. The soybean market does not rally unless the world stocks-to-use ratio falls to into the 20% to 22% range, and this must coincide with rising Chinese import volumes. A coincidence of these two factors does not seem plausible for at least several years.
Going forward, we need to consider the combined impact of ASF and coronavirus on feed crop prices for the remainder of the 2019-20 marketing year and 2020-21 season to come.
We will start by making several basic assumptions: First, supply-wise, world corn and soybean supplies are fixed and will not respond to further ASF and corona virus related news until well into H2 2020.
Before H2 2020, the twin crises can cause demand fluctuations but supplies are fixed for several months. This is because for the 2019-20 marketing year, both the North American and South American corn and soybean crops are already harvested, with most of the remainder just making its way to Latin American shipping ports.
In the months to come, first US corn and soybean planting intentions, later those of Brazil and Argentina will be impacted by ASF and corona virus related news and its anticipated impact on Asian feed demand. Short-term logistical difficulties in either Brazil or coronavirus impacted China may cause temporary mismatches between supply and demand but with the current marketing year crops already grown, the potential for market movement is limited. Hence, the potential for price or supply volatility is minimal before the next American harvests are well into their growing seasons.
At the same time, the twin ASF/coronavirus crises are giving the market a deflationary bias –and this could impact supplies and market adjustment speed in the year to come. Having traded at under $4.00/bushel since late August 2019 with no end in sight, low corn returns may coincide with ASF/coronavirus news that impacts market confidence.
Here we can make several interesting observations and inferences. First, corn supplies were downtrending even before ASF and coronavirus hit. Moreover, corn's price is closer to the farming cost break-even-point than that of soybeans. Hence, a spell of ASF/corona virus-induced deflation may motivate farmers to further cut back corn acreage and accelerate the next market rally's arrival –though even that assumes these crises will peak and dissipate in 2020.
This, in fact, is likely: China is the most impacted by both ASF and coronavirus: Because it was the first country to suffer these outbreaks, it will be the first to also recover. Given the size of China's market, this will be positive for world agribusiness.
At the same time, we have already demonstrated the minimal impact ASF has had on world corn supplies and prices. With soybeans already in bloated oversupply, the inevitable downtrend in their inventory levels will not be significantly delayed by either ASF or coronavirus –the latter's deflation can actually help cut back acreage and harvest size, thereby accelerating the oilseed market surplus– though this will lag corn's eventual adjustment by at least a few years.
On the whole, however, the impact of ASF and coronavirus on corn and soybean markets is paradoxical.
Both markets are slowly winding down their supply surpluses towards a mid-2020s bull rally, with corn having made significantly more progress along the inventory wind-down process. The more coronavirus and ASF deflate agribusiness commodity prices early in the 2020 US growing season, the faster corn and soybean demand will fall behind harvests –something that needs to happen even after these two demand shocks have dissipated.
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