April 15, 2014
Corn firms up as soy, palm, oilseed fundamentals weaken
China's feed demand has fallen two years in a row. Importing 11 to 13 times soy than corn, the former will be impacted far more strongly than the latter.
by Eric J. BROOKS
An eFeedLink  Exclusive Commentary
Coming at a time of year when overly optimistic crop estimates frequently pull down prices, the USDA's April WASDE was unusual, pulling both corn and soy inventories to levels that provide price support. But whereas corn, which flirted with levels near US$4.10/bushel earlier in the year and now looks parked near US$5.00/bushel, soy, despite  ultra-low domestic supplies, looks set to soften further.
Corn stocks-to-use ratio falls below 10%
Corn, which was en route to closing 2013-14 inventories of 50 million tonnes+ just six months ago, was pulled down another notch. After starting the year on the low side of trader's estimates at 45.5 million tonnes, traders thought corn inventory declines had bottomed out at March's 37.0 million tonnes. We warned in our earlier report that on the back of strong export demand and unusually low ethanol inventories needed a downward adjustment.
Although the USDA did not take the need to rebuild those low ethanol inventories in the run up to America's May to August heavy driving season, late season dry weather cut Brazil and Argentina's expected contributions to the world corn market by several million tonnes. With no one left to take up the slack but Uncle Sam, that forced a revision of US corn export total from 36.8 million tonnes in January to 41.3 million tonnes in March and 45.5 million tonnes in April.

That helped drag the above mentioned 2013-14 inventories to 33.8 million tonnes, and the closing US corn stocks-to-use ratio to 9.9% -back in the low range commonly seen during the feed price inflation years of 2007-09 and 2010-12, when corn was usually seen in the US$5.00/bushel to US$6.50/range.
Going forward, the USDA has yet to take into account rising domestic ethanol output or even slash Ukrainian corn export estimates, despite the festering political crisis in the latter. While China's softening feed demand and other factors will not let corn climb above US$5.50/bushel at this time, all the above mentioned factors imply that dreams of US$4.50/bushel or lower are gone, at least not unless this year's US harvest springs an expectedly bountiful surprise upon us.
Soy, palm oil shakier than they look

Superficially, the USDA's report also strengthened the outlook for soy. From an already low 4.6 million tonnes in January, April saw 2013-14 soy inventories to record lows of 3.67 million tonnes and a 4.0% stocks-to-use ratio. That puts pressure on domestic US soy prices, where the low inventories can impact its feed-to-meat supply chain.
However, given Brazil and Argentina's combined 48.8 million tonnes of closing soy inventories, America's low soy inventories impact its domestic feed-to-meat supply chain much more than they do the world market, where CBOT soy's price is set. Even though Brazil's soy crop estimate fell from the 94 million tonne predictions common several months ago to a USDA estimated 86.5 million tonnes, and (based on rains coming too late) should be more realistically 84.5 million tonnes, more than large Latin American inventories are working to keep soy down; there are also growing demand-side questions putting a cloud over the market.

Benson Quinn commodities noted that, "The soy complex is struggling following reports that three Chinese crushers have defaulted on purchases of 500,000 tonnes of Brazilian beans." Darrell Holaday, an analyst with Country futures noted that, "The problems in China continue to come to the forefront as they are causing some significant financial losses. One firm has reportedly taken a US$4 million hit on a four-cargo [soybean] agreement that has been washed out of; they are now trying to dump those cargoes into other markets."

China was also putting downward pressure on corn, as the National Grain and Feed Association reported that the actual quantity of GM-tainted corn rejected as around 1.4m tonnes, not the previously underestimated 900,000-tonne figure. But with corn demand picking up elsewhere, these figures do not deflate the corn market to anywhere near the same extent that China's rejection of soy does oilseeds.

The reason is very simple: 109 million tonnes of soy and 119 million tonnes of corn will be exported to the world market in 2013-14. However, whereas Chinese import demand currently absorbs a mere 4.2% of world corn exports, the country single-handily purchases 63.1% of the soy exported to the world market.

Therefore, any change in China's feed demand can drastically impact the world soy market, and with it, CBOT soy futures. Here, the news is not good: After rising at a 10%+ rate in the 1980 and 1990s and at a healthy 4%+ rate throughout the 2000s, China's feed demand has more than stopped growing. For the first time since in the thirty years since its economic liberalisation began in the early 1980s, 2014 will see China's feed demand fall a second consecutive year.

This is due both to China's ongoing economic slowdown and also the fact that for a second consecutive year, H7N9 bird flu decimated both poultry inventories and consumption. At 189 million tonnes, China's most recent 2014 feed output estimates put it 2.8% below 2012's level. If it had grown to expectations, its feed demand by now would have grown by at least 7%, and have totalled 208 million tonnes. Between the lower demand and the country's negative crushing margins in the first quarter of this year, there is no way previous soy consumption estimates can be met.

Despite all these obvious facts and a second Chinese bird flu outbreak staring it in the face, since November, the USDA has not changed its 2013-14 China soy import estimate from 69 million tonnes. Keep in mind that Chinese soy imports were 59 million tonnes in 2011-12, the year of China's peak feed demand. Last year, with the bird flu epidemic dropping chicken inventories by 24% in three months, their rebound was not enough to keep feed demand growing, and soy imports stayed constant at 59 million tonnes.

To suppose, in the face of a second 5% drop in broiler inventories from November to January, a concurrent nasty swine disease outbreaks and worsening economic conditions, China's soy imports would increase by 17% or 10 million tonnes to 69 million tonnes -while feed demand falls from its 2013 total or, under the most optimistic scenario, stays flat- is patently unrealistic.

Given China's faltering feed production, besieged poultry sector and recent reports of large soy export cancellations, is it not far more reasonable and conservative to put China's estimated 2013-14 soy import total at 64 million tonnes? Doing so would boost world closing soy inventories from the USDA estimated 69.4 million tonnes to around 74.5 million tonnes.

That would leave China's soy imports at 86% of world soy inventories. Keep in mind that China's soy imports amounted to well over 100% of world soy inventories during most of the inflationary years of 2010 to 2012 -and that the world soy market tends to go soft whenever this number slips below 90%.

All this implies that barring a disastrous US soy harvest, an unexpectedly strong rebound in Chinese livestock numbers, or combination thereof, we are headed not just for softer soy prices but softer markets for other oilseeds as well. For example, unburdened by domestic oilseed shortages in Europe's feed-to-meat supply chain, Paris rapeseed May contract moved up a marginal 0.4% while the November contract fell 0.8%, to €367.25/tonne.
Palm supply overtakes demand, will track soy trend
On the other side of the oil and oilseed complex, two months of serious drought have given way to steady rains in Malaysia and Indonesia. Because palm fruits react to a dry spell by delaying their blooming until rain occurs, the resumption of regular rains resulted in unusually large March output. March's 17% monthly output occurred because much of the production that should have occurred in February (had it rained) got moved into the following month.

As a result, instead of the widely expected supply drop, Malaysia's Palm Oil Board reported that March saw palm oil inventories climb 1.9% to 1.69 million tonnes, on the back of 1.5 million tonne monthly output. As a result, prices which peaked near MYR2760/tonne (US$850/tonne) prior to mid-March, have fallen back to near MYR2,600/tonne (US$801/tonne) at the time of publication, some 6% off their late first quarter peaks.
Going forward, while the drought did some damage, it helped make for slower supply growth that will be matched by a smaller rise in consumption. The USDA projects 2013-14 world crude palm oil output to miss the 6.6% average increase seen from 2011 to 2013 inclusive, rising just 4.8% this year, to 58.4 million tonnes. World crude palm oil demand increased at an average 6.8% pace over the previous three years but is projected to rise by 3.6% in 2014, less than the projected supply increase.
On one hand, analyst firm MIDF notes that in US dollar terms, palm oil is now priced 13.8% lower than soybean oil, noting that, "If the discount continues to widen, this will help CPO price to sustain above the current level as buyer swill prefer more palm oil due to its price attractiveness."
On the other hand, such a forecast depends on soy fundamentals staying constant or firming. However, with China's appetite for soy waning, that is not the case this year.

Hence, weakening fundamentals across the oilseed complex means that soy will not receive any price support from its competitors. It also implies that should China's demand for soy imports fall from current, optimistic looking USDA estimates, palm oil, rapeseed and the wider oilseed complex may come under renewed downward price pressure.

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