October 12, 2015
Firm corn, besieged soy, overabundant palm
Corn's falling harvest strives to match slack demand but soy faces bloated marketfundamentals; both from its own inventories and those of substitute oilseeds.
An eFeedLink Exclusive Commentary
Though the USDA's most recent monthly report nominally cut both feed grain and soy harvest forecasts, it reduced corn by less than was expected, thereby extending its short-term, downward bias. The official corn yield estimate of 168bushels/acre made for a harvest of 344.3 million tonnes.
Corn supply tighter in US, looser overseas
Although slightly higher than the market consensus estimate of 166.6bushels/acre, circumstances in America and overseas will neutralize this marginally higher yield's impact. The harvest's estimated size is merely 0.2% less than the previous month's projection. While it is 4.6% less than 2014-15's 361.1 million tonnes, this still makes for the second highest corn yield and the third largest harvest on record.
However, with US feed demand and export estimates kept constant at 304 million tonnes and 47 million tonnes respectively, the resulting lower harvest cause closing 2015-16 inventories to slip from 40.45 million ton 39.66 million tonnes.
Even so, America's closing corn stocks-to-use, stayed roughly constant. Because of corn market circumstances in the rest of the world, its dip from 11.6% to 11.4% was rendered immaterial.
While America's corn market tightened up, everywhere else, demand fell faster than supply. This was due to slightly lower projected harvests in places like Brazil and Argentina (due to a shift towards soy planting) and Ukraine (due to disappointing weather)
Corn approaching market balance but…
A 4.7 million tonnes corn harvest estimate outside America were more than offset by 4.8 million tonnes of less corn demand outside of the United States.
As a result, while estimated closing world corn inventories fell 1% from 189.7 to 187.8 million tonnes, the world stocks-to-use ratio stayed constant is at least leveling out, falling from 2014-15's peak of 19.5% to a still high (but at least lower) 19.1%.
Granted: Such a corn stocks-to-use ratio above 15% is hardly inflationary. Nevertheless, with 2015-16's corn harvest expected to fall by 36.1 million tonnes or 3.6% and corn demand only falling by 8 million tonnes or 0.8%, at least corn supply and demand are getting closer to market equilibrium –and corn is making visible progress towards ending its market bottom.
Having said that, over the medium term however, both a lack of additional news and the tendency for El Nino-driven precipitation to create bountiful crops in Brazil and Argentina points to CBOT corn staying within its current US$3.60/bushel to US$4.10/bushel trading range.
…a bearish soy supply/demand trend has yet to turn the corner
While corn remained neutral near its cyclical market bottom, soy showed every indication of needing to deflate further: For unlike corn, neither soy harvests nor inventories have started to level out, much less fall significantly.
Granted, at 47.2bushels/acre and 105.8 million tonnes, American soy harvest and yield estimates conformed to the pre-report expectations of market observers. Even so, with this year's harvest only a million tonnes and 1% below last year's record crop, a nominal reduction in the harvest estimate was hardly inflationary.
In the wider global market, a 1.3 million reduction in US soybean production from the previous month's report was more than offset by an estimated 3 million tonne increase in Brazil's 2015-16 harvest, which is expected to total 100 million tonnes for the first time. That kept closing 2015-16 world soy inventories at a record breaking 85 million tonnes, up 9% from just under 78 million in the previous marketing year.
The ultimate sign of soy's deflationary market surplus is its bloated stocks-to-use ratio. October's USDA report pushed it even higher, from 2014-15's 26.4% to an estimated 27.4% in the current marketing year.
Moreover, not only is soy's world stocks-to-use ratio 1.43 times higher than that of corn, actual oilseed inventories have not even yet started to trend down to meet consumption. –Unlike corn, which is seeing its 2015-16 estimated world harvest fall by nearly 36.1 million tonnes or 3.6%, the estimated global soy harvest was again revised upward, from 319 million tonnes to a record 320 million.
At this point, soy's growing oversupply is now a longterm market trend: The past three years have seen world soy production exceed global soybean consumption by 7.9 million tonnes in 2013-14, 21.1 million tonnes in 2014-15 and a projected 10 million tonnes in for 2015-16.
It should also be noted that the 10 million tonne estimate of this year's soy production exceeding demand may turn out to be too conservative: El Nino conditions in South America usually result in high soy yields. With soy having fallen by less than expected up to this time, Latin farmers are shifting acres from less profitable corn and wheat to soy.
Price competition from palm
Moreover palm oil, soy's main vegetable oil rival (and substitute in ruminant feed) also faces record high inventories and low prices. Partly due to its oversupply, partly because of the Malaysian ringgit's steep drop against the US dollar, palm oil's 38% drop since the start of the year exceeds soy's 30% fall over the same time.
Worst is over for corn, but not soy
As the attached chart shows, substitute feed inputs and oilseeds have fallen by more than either corn or soy. Moreover, corn is trading at roughly the same price as a year ago, while soy is 15% to 20% lower. This is because from 2013 onwards, corn fell in price first and fell more sharply, thereby encouraging its consumption and discouraging excess production.

Compared to a year ago, wheat is significantly more discounted relative to corn. However, with corn still priced a third lower than wheat, the scope for the latter's substitution in place of the former remains low, and this provides corn with crucial price support at this time.
In the case of soy, the fact it performed worse than corn over the past year is misleading: Corn endured more than 2.5 years of steeper deflation before finding support somewhere above US$3.50/bushel.
Because its oversupply situation is worse, soy needs to drop by more than corn's 55% fall from its 2012 record high (soy's 2012 record high was near US$17.70/bushel). This implies that barring unnaturally bad weather, CBOT soy needs to fall below by at least 10% from present levels, near to US$8/bushel or lower for an extended period of time –something it has not done since the late 2000s.
In conclusion, with soy facing pressure from both its own bloated inventories and abundant, low cost substitutes, it is difficult to imagine the soy complex or vegetable based protein meals rising by much in price. Corn however, looks firm and could respond to unexpectedly bad weather by staging a limited but unexpected rally.

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