September 12, 2014
An autumn of abundance
Amid mounting crop surpluses and a down trending global liquidity cycle, corn and soy fundamentals have not looked this deflationary since last decade's financial crisis.
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
In our August feed crop articles, we predicted that the USDA's inevitable boosting of record yields would tank corn and soy futures as the harvested crops started to come in. This process is now well underway and merely needed timely news to trigger a new downtrend: Within hours of September's WASDE report's release, corn and soy fell to their lowest levels since mid-2010, when their previous bear market ended.
Corn, wheat under pressure
Corn's yield and harvest were pegged at record levels of 171.1bushels/acre and 365.66 million tonnes respectively, with scope for yields to be further revised upward and the final crop to total somewhere from 370 to 375 million tonnes. The USDA's estimated 2.5 million tonne increase in feed demand, 1.9 increase in ethanol makers' corn procurements and 0.6 million increase in corn exports fell far short of the resulting 9.2 million boost to the harvest.
This jacked up closing 2014-15 closing inventories 4.91 million tonnes or a whopping 10.7% from August's estimate to over the critical 50 million tonne level. With the USDA revising red meat production estimates downward and the harvest likely to be revised upwards again in the fourth quarter, the current 50.8 million tonne closing inventory estimate appears headed closer to 55 million tonnes. That would result in the stocks-to-use ratio of 14.7% rising close to 16%.
America's overabundance was compounded by international corn production estimates. On one hand, lower corn prices is reducing the incentive to plant acreage in South America's upcoming growing season. As a result, Argentina's expected harvest has been beaten down from 26 million tonnes to 23 million. This however, is partly offset by a one million tonne revision to the Brazilian harvest, now estimated at 74 million tonnes.
Similarly, arid conditions caused China's corn harvest to be revised down from 222 million tonnes to 217 million. Even so, with consumption at 220 million tonnes, it only makes for 3 million tonnes of Chinese corn imports, considerably less than the 15 million tonnes many analysts had forecast by 2015. As we discuss later in this article, China's impact on the world corn market could change in a dramatic manner. For now however, it is offering no support and world inventories are projected to crest at a record 189 million tonnes.
The feed grain market's slack fundamentals are made worse by wheat's supply rich balance. A year ago, it was expected 2013-14 inventories would close near 173 million tonnes. Instead, they ended 2013-14 at a much higher 186.5 million tonnes and are projected to finish 2014-15 at 196 million tonnes.
Even wheat's misfortunes are turning against corn: A major exporter of high quality milling wheat, heavy rains degraded much of France's crop to feed quality. This forced France to import milling wheat while exporting rain damaged wheat to overseas feed mills. With rain damaged wheat from France and other European growers finding its way to Central and East Asian feed mills, it puts additional downward pressure on corn.
Although such a low price may leader lead to a significant acreage reduction (and subsequent price rebound) next year, barring an early winter frost, corn and wheat could approach US$3.00/bushel and US$4.00/bushel respectively.
Soy weighed down by abundance
The situation is, if anything, even more deflationary for soy. Even with soy trading below US$9.90/bushel at the time of this article's writing, with CBOT corn at US$3.41/bushel, the soy:corn price ratio stands at 2.89. That is well above the critical 2.5:1 threshold that motivates more soy to be planted in place of corn. Barring surprisingly bad weather, corn cannot go above US$3.50/bushel anytime soon. For the soy:corn price ratio to fall to 2.5 at that corn price, CBOT soy would have to fall to US$8.75/bushel.
A ratio in favour of soy planting aside, soy's oversupply is becoming more problematic than that of corn for another reason: With corn's lower selling price and higher fertilizer costs, it becomes uneconomical for many farms to plant it at below US$4.00/bushel. While soy's falling price will discourage its planting on new, virgin Brazilian farmland, it will only take good weather to boost the new season's yield and harvest at a time of record world inventories.
While South America's relationship with soy prices impacts the 2015 leg of the futures curve, fourth quarter prices face considerable pressure from the American crop's exceptional size. Amid ideal growing conditions, the USDA boosted its American soy harvest to a whopping 106.5 million tonnes, exceeding its previous 2009 record crop of 91.5 million tonnes by a resounding 16.5%. The 1.17 million tonnes that feed demand and exports were boosted by was more than offset by its 2.65 million tonne boost to the soy harvest.
From a forty year, 2013-14 low of 3.55 million tonnes and 3.9% soy stocks-to-use ratio, inventories may yet quadruple. Currently estimated to close 2014-15 at 12.9 million tonnes with a stocks-to-use ratio of 13.3%, inventories could go higher and stocks-to-use could approach 15% in coming months.
Even so, the US's new found soy abundance is dwarfed by that of South America. Brazil, Argentina and Paraguay collectively own 58 million tonnes of soy inventory, offsetting exports and domestic usage totaling 149.4 million tonnes. This gives the top three South American exporters a far higher stocks-to-use ratio of 38.8%.
Coming at a time when global liquidity cycles have peaked and are turning downwards, the implications are clearly deflationary for both the feed grain and oilseed market.
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