April 22, 2014
Vietnam plays the world corn market
An early year drought is counterbalanced by low corn prices and the availability of discounted shipments rejected by China.
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
A certified importer of the majority of its feed inputs, Vietnam has a track record of using strategic feed crop sourcing and good market timing to minimize its growing dependence on foreign feed crops. This year is yet another example of this, the long-term trend towards heavy dependence remains in place.
Feed wheat fades away, corn, DDGS rebound back
Due to Vietnam's multi-decade 5% to 8% annual rise in meat demand (and even faster rise in feed production) outstripped domestic corn supplies in the late 2000s, corn imports suddenly surged from near zero in the early 2000s, to 0.59 million tonnes in 2007-08, peaking at 1.48 million tonnes in 2008-09. Thereafter, a worldwide surplus of rain-damaged, feed quality wheat, came to the rescue.
From a mere 0.28 million tonnes in 2008-09, Vietnam leveraged the turn of the decade's relative abundance of wheat against that time's high corn prices, such that by 2011-12, feed wheat import totaled 1.1 million tonnes. That had the effect of pushing corn import volumes back to slightly above 1 million tonnes for a couple of years, even as feed demand continued to outrace domestic corn supplies.
Subsequently, the years since 2012 have seen wheat regain its traditional price premium over corn. Along with last year's bottoming out of CBOT corn below US$4.30/bushel, this has made feed wheat imports fall back to their previous level of 0.25 million tonnes in 2013-14. While wheat is becoming more plentiful relative to corn, it is nowhere near as cheap or abundant as it was at the turn of the decade. Hence, the USDA estimates that Vietnam's 2014-15 feed wheat imports will nominally rebound to 0.35 million tonnes.
Whereas most of yesteryear's massive feed wheat imports came from Australia, this however, may not be the case in the future. The USDA reports that Vietnam is shifting its purchasing strategy, reserving higher priced purchases for flour milling wheat from the US, Australia and Canada, while looking at bids from India and the Black Sea for feed wheat.
Of course, with feed wheat imports falling off and feed demand growing at its usual 5% to 10% pace, this causes a massive comeback in corn import volumes. By 2012-13, corn imports jumped 65% in two years, to 1.65 million tonnes. Even though 2013's corn harvest came in 395,000 tonnes and 8.3% above expectations, the years to come will make this the above import volume look small.
Imports boom on cheap Brazil, China rejected US shipments
In early April, the US Grains Council reported that according to the general department of Vietnam customs, "In calendar year 2014, Vietnam's corn imports have increased more than 400% over the same period last year to a total of 1.41 million metric tons (versus 0.282 million tonnes in the first quarter of 2013).
That forced the USDA to boost its 2013-14 Vietnam corn import total from the already high 2.2 million tonnes to 2.4 million tonnes, beating the record set the previous year by 45.6%. This is partly due to Southeast Asia's serious drought in the first three months of this year, which disrupted production of all the region's crops, corn included. Both short and long-term factors are behind this corn import spike.
The USDA has underestimated the drought's impact, expecting Vietnam's corn production to rise 2.8%, from 5.196 million tonnes in 2013-14 marketing year (which ends April 30th) to 5.340 million tonnes in 2014-15 With corn planted area only increasing 2.3%, first half yields cut by a severe early year drought and a El Nino dry spell forecast for later in the year, it is hard to see crop yields matching last year's 4.43 tonnes/hectare, or nominally rising to the forecasted 4.45tonnes/hectare.
Assuming this year's first drought makes corn yields fall (a conservative) 5% and planted area increases 2.8%, there is increasing probability that an El Nino-induced dry spell will hit in the second half of this year. Hence, drought and the possibility of further dry spells more than offsets the marginally larger planted area, making for a crop no larger than 5.2 million tonnes.
Having said that with 2013-14 corn consumption at 6.7 million tonnes and 2014-15's rising another 3% to 6.9 million tonnes, in theory, Vietnam did not need to import over two million tonnes of corn this year, let alone the estimated 2.4 million tonnes it is on track to do so.
In reality, there is more than a need to keep domestic feed costs under control. At 261,000 tonnes, 2013's ending inventories were not enough to put any inflationary corn price hikes that could arise should dry conditions persist. Particularly if the harvest comes a half million tonnes below expectations, those low inventory numbers could fuel a food price spiral, which is the last thing the country's policymakers want to see.
Seeing dry conditions ahead and very low prices for Brazilian corn at the turn of the year, Vietnam replaced some of the Indian corn it usually purchases with shipments from Brazil. Thereafter, a coincidence of circumstances made Vietnam make another left turn its corn procurement policy: Furthermore, when China rejected several cargoes of corn and DDGS due to the presence of GM corn, Vietnam took advantage of the situation to buy those orphaned US corn shipments at a discount.
It probably did this so that if a drought made the corn crop come in half a million tonnes below expectations, a windfall of US corn bought at fire sale prices would come in handy. At this time, even if the harvest comes in 250,000 tonnes below expectations as we forecast, Vietnam can fill the supply gap with a 450,000 to 500,000 tonne cushion of closing inventories, mostly purchased at the lowest corn prices seen since 2010.
Over the longer term however, Vietnam has the following dilemma: From 2008 to 2013, the annual corn harvest increased 13% but feed demand increased by 60% over this time. With corn harvests rising at a 2.5% annual rate, but feed demand rising by 9.5% annually since 2008, a surplus of feed wheat staved off rapid corn import growth. This year's corn was bought at a relatively low prices and on good terms, but with long-term feed demand is rising three times faster than corn harvests.
Moreover, the USDA reports that over 90% of Vietnam's crop is already planted with hybrid corn seeds. With corn grown mostly on marginal land that cannot be used by higher value crops such as rice, it is difficult to expand cultivated area, especially now that world corn prices are not at the historic highs they were at several years ago.
Over the medium term, barring a very poor harvest, the USDA predicts that with inventories restored to high levels, 2024-15 corn imports will fall back to 2.2 million tonnes. Beyond this point however, unless Vietnam creates subsidies to encourage planting of corn in place of other crops, or starts growing GM corn, the country looks set for corn imports to total 3 million tonnes by the latter part of this decade, if not earlier. Although GM corn was approved in 2013, there are no trials, much less commercial use at this point.
With feed demand continuing to grow at a (conservatively estimated) 5% to 8% annual rate, there appears to be no way corn harvests can keep pace with growing meat demand.
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