November 14, 2016

Another year of plentiful feed supplies and low prices


An eFeedLink Hot Topic
  • 2017 should see world feed costs fall for a fourth consecutive year
  • Instead of low CBOT prices and China corn market reform shrinking inventories, a combination of good weather and better crop seeds are pushing both corn and soy stocks to record highs
  • China market liberalization's corn inventory reduction was more than counterweighted by a record American harvest and bloated US inventories
  • After a prolonged period of historically low inventories, the rebounding of US soybean inventories to normal levels resulted in world inventories breaking their newly set record.
  • Even if emerging La Nina conditions result in arid South American growing season, the current oversupply is poised to keep feed grains and oilseed costs at low levels through at least H1 2017
When it comes to feed supplies, the news keeps getting better for mills and livestock farmers –and worse for feed crop farmers. A year ago, it was hoped that world feed crop inventories would start to level out near a USDA estimated 210 million tonnes and 77 million tonnes for soy, but this has not happened.
For corn, the post 2012 world supply buildup got even worse, as a levelling off of Chinese inventories was more than counterbalanced growing American supplies.
From 2012-13 through the 2015-16 marketing year's late August closing, a combination of good crop growing weather, the levelling off of US ethanol output and falling Chinese feed demand bloated world corn supplies and crashed prices. US corn inventories jumped 144% over four years from 25 million tonnes in Q3 2012 to 61 million in early September. Over this same time, Chinese corn stocks jumped from 59.3 million tonnes to 110.7 million tonnes. Together, they jacked up world corn inventories 63% over four years or 12.8% annually, from 128 to a record 209 million tonnes.
With large inventories deflating prices into the weak US$3.10/bushel to US$3.80/bushel range, it was hoped that reduced planting would trim inventories but this was counterbalanced by unusually good northern hemisphere growing weather. While China's newly liberalized corn market helped reduce the its planted acreage, rising yields and good growing weather resulted in a record 216 million tonne corn harvest. The second largest harvest on record will reduce its inventory from 110 to a still highly bloated 103 million tonnes.
Better seeds and good growing weather also pushed US yields and harvest to record levels, the latter's 386.7 million tonnes, 12% more than last year's 345.5 million tonnes and 7.1% better than the previous 361.1 million tonne record. However, with domestic demand flat up by only 13 million tonnes and exports rising by less than a million tonnes over the previous year, most of the 26 million tonne harvest increase over 2015 is going into storage.
The resulting 17 million tonne rise in US corn inventories more than counterbalances the 7 million fewer tonnes in China. Consequently, after levelling out in the 208 to 209 million tonne range from 2014 through 2016, 2016-17 world corn inventories will jump another 4% to 218.2 million tonnes. With levels below 15% signaling inflation and above 18% implying deflation, corn's stocks-to-use ratio stays at over 21% for third consecutive year, barely down from its 22.8% peak achieved in 2014-15.
Moreover, the entire supply increase collides into faltering world demand that is being slowed by slowing global growth, US election caused market uncertainty and faltering Chinese meat demand.
While the jury is still out on this year's South American harvest, all this is enough to ensure that corn drifts into the lower end of its current range, possibly nearer to US$3/bushel should the Brazilian and Argentine harvests turn out to be adequate.
On the protein meal side, soy prices also appear poised to stay depressed for some time.  Here, America and Brazil are the deflationary culprits: With soymeal crushing capacity not expanding as rapidly as raw bean supplies, soymeal prices held up better than bean futures. Over the last few years, this provided soy better return than corn, which fell in price more quickly and steeply.
With American and Brazilian farmers shifting acres from corn to soy, their output jumped disproportionately quickly. US soy output rose 40.8% over five growing seasons, from 82.8 million tonnes in 2011-12 to a record 118.7 million tonnes this year. With corn returns falling, Brazil's output grew an even faster 53.4%, from 66.2 million tonnes to 102 million tonnes over the same period. At the same time, China's soybean imports, while still growing rapidly, did so at only half the speed of the previous five year period.
Hence, booming output in the top two soybean suppliers coincided with decelerating demand growth in China, which buy 63% of world exports. Lacking a destination, surplus US and Brazilian soy bloated world inventories, which rose 48%, from 52.9 million tonnes into the 77 to 78.5 million tonne range in 2014 and 2015.
As was the case with corn, it was hoped that lower returns would lead to less production and stabilize the market by this time, but this was not to be. After stabilizing in the 106 to 107 million tonne range for two growing seasons, plunging grain prices made US farmers plant more soy than was anticipated. Alongside idyllic crop growing weather, this is resulting in this year's US crop jumping a whopping 11%, to a USDA estimated 118.7 million tonnes.
The good news is that plentiful supplies and low prices have caused world soybean consumption to rise by a USDA projected 4% in 2016-17 and by 9.3% over the past two growing seasons. This will eventually change soy's supply-demand balance in favour of the latter. For example, in 2014-15, 319.8 million tonnes of soy harvested swamped 300.7 million tonnes of world consumption. By 2015-16, the market had achieved balance: a harvest of 313.2 million tonnes was exceeded by 315.5 million tonnes of world soy consumption.
Unfortunately, this year's bumper harvest has set back the market adjustment process by a year or more: With the world economy slowing amid a sustained boom in US output, world soy demand of 328.8 million tonnes was not enough to counterweigh 333.2 million tonnes of bean production in 2016-17. That leaves the world soybean stocks-to-use ratio almost unchanged, from a bloated 24% last year to nearly 25% by the end of the current marketing year.
Consequently, it is difficult to see how soybeans, which have been trading slightly below US$10/bushel, can avoid sinking towards US$9/bushel or less by H1 2017.
All this is great news for livestock farmers. According to statistics from Alltech's global feed survey, from US$500 billion in 2013, the amount livestock farmers paid for feed fell to US$460 billion in 2014 and was no higher than US$400 billion in 2015.  With feed output rising by 3.4% over this time, the cost of feed fell by 25%, and did so even more this year.
That means that feed's average price fell by nearly a third over the last four years and looks set to stay at low levels for at least another year. This does wonders for livestock rearing margins but if you are a corn or soy farmer reading these words, it also means that you must brace yourself for yet another difficult year.

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