FEED Business Worldwide - December, 2011
Corn takes a beating but stays expensive amid tight supplies and strong export demand
by Eric J. BROOKS
A variety of factors are softening markets for many feed grains but not the most critical one of all, corn. Battered by improving harvest forecasts for most major grains (except corn), the prices of soy, wheat and corn are down 13.3%, 17.2% and 17.5% respectively from their September highs. At the same time, corn's smaller but still significant fall shows another factor at work –that of the EU's financial crisis.  Taking the world economy to the brink of insolvency several times over the last two months, it induced a downdraft across all commodities, super-tight world corn supplies were not exempted from its impact.
Ironically, corn has suffered the smallest two-month loss of any major feed crop, even though it initially suffered the greatest losses among all feed crops. While September saw corn suffer its worse monthly losses since 1996, it was almost entirely due to the European banking crisis and not because of any market fundamentals. According to French bank Société Générale, the EU financial crisis caused the value of Credit Default Swaps (CDSs) designed to protect Greek bondholders to jump by 4%. When that occurred, risk management procedures for covering funding shortfalls (and avoiding a financial meltdown) forced affected EU banks to sell off their commodity market positions, which were heavily invested in grain futures.
Société Générale concluded that, "Some outflows may have come from higher levels of risk aversion, but we think this was only a secondary cause", as the sell-off was triggered by EU banks selling off commodities to avert their own insolvency. A November 3rd report in Agrimoney.com article titled "Bank fears behind commodities bloodbath" similarly summarized that the early Fall meltdown in grains and metals was due to, "fears for [EU] banks being unable to pay up more than concerns for the raw materials themselves."
Corn, not wheat, now leads rallies
The macroeconomic element's chilling impact on grains was also manifested by the US dollar, which has climbed some 6%, as is its tendency during any serious financial crisis. A higher dollar normally deflates feed crop prices and the greenback's recent, crisis-driven upswing was no exception, with CBOT corn hitting US$5.80/bushel at one point. Having said that, after rebounding back to US$6.50/bushel, corn's price has stayed up at a higher level for a far longer time than it did during 2008's financial troubles. In fact, after suffering one of its worst monthly falls on record in October, corn prices remain more than 100% above their pre-2007 US$2/bushel to US$3/bushel range
Indeed, when we examine the grain complex's overall fundamentals, we are now seeing a reversal of the relationship between corn and wheat from a year ago. When the current rally started in 2010, Russia's drought pulled up wheat prices first, pulling up then-depressed CBOT corn futures in the process. Now, with the world on the path to bumper wheat harvest amid shortages of corn, the opposite is happening: Tight corn supplies worldwide are forcing an unusually high proportion of wheat to be used as feed, thereby keeping its price higher than would otherwise be expected. In this way, corn's enduring supply tightness is putting a floor under the entire feed grain complex.
Nor is the corn supply situation likely to improve anytime soon: At 315.8 million tonnes, the US harvest is at least 7% or 24 million tonnes below Spring 2011's hopes of a 340 million tonne harvest. With poor harvest reports coming in across America's corn belt, this forecast may be further downgraded in mid November's USDA report. While the Ukraine and South Africa enjoyed bumper harvests, their exceeding of expectations by several million tonnes cannot make up for a US crop more than 20 million tonnes below expectations.
In fact, Asian buyers have rushed to make purchases on every one of this year's price swoons and ground level reports imply that this behavior is continuing. The US Grain Council's ASEAN office recently quipped that, "South East Asia's regional feed millers have been sitting on the edge of their chairs watching the Chicago corn market", adding that, "millers are taking advantage of every temporary dip in the price of corn" Similarly, at a recent London commodity conference, FC Stone analyst Doug Jackson described China's grain importers as having "sweaty palms" while waiting for price drops to provide a corn importing opportunity.
Europe's banking crisis sell-off notwithstanding, such opportunistic buying behavior is usually not seen right after a grain has suffered one of its biggest market crashes on record. This implies that liquidity problems of European banking aside, corn supplies remain exceptionally tight and it simply cannot stay low in price for too long.
Mexico, China, Southeast Asia need more imports
Indeed, while the crucial American corn harvest continues to disappoint expectations, higher than expected corn export demand from China and Southeast Asia is causing many to conclude that the USDA's 40.6 million tonne American corn export estimate is at least 3% to 4% too low.
According to Rich Nelson, research director at analyst firm Allendale, "In addition we fell the strong export pace justifies a 50 million bushel [1.27 million tonne or 3.1%] increase over the USDA's latest estimate." Yet, if anything, such calls may underestimate export demand. For at this time, we see signs that the market is ready to significantly more corn exports than what the USDA has penciled in.
For example, an early frost in Mexico had been preceded by late rains and floods earlier in the growing season. This slashed Mexico's corn harvest size by 14.6%, from a USDA-estimated 24.0 million tonnes to just 20.5 million tonnes, which is less than last year's crop. With the country's own population and per capita meat demand both growing rapidly, the USDA concluded that it has no option but to boost its Mexican corn import estimate by 6.2% or 600,000 tonnes, from 9.2 million tonnes to 9.8 million tonnes. This will exceed Mexico's 2007 record import volume of 9.6 million tonnes. It also puts Mexico on track to overtake South Korea as the world's second largest corn importer after Japan.
If Mexico is boosting demand today, going forward, we also see the prospect at least several million more tonnes of corn imports required by China and Southeast Asia. The latter's demand is driven by Thailand over the short-term but by Vietnam and Indonesia over the longer-term. While not the region's largest corn importer, widespread flooding has wiped out a significant portion of Thailand's crop, requiring it to import more over the coming months.
But Thailand is actually a small part of Southeast Asia's rising appetite for corn. With Vietnam and Indonesia leading the way, the US Grains Council (USGC) reports that feed grain demand had grown strongly, "in every single Southeast Asian market." Adel Yusopov, the USGC's regional director for Southeast Asia reports that, "The region is expected to import a record 7.5 million to 8 million tonnes of corn in 2011," and that volumes have risen by 60% from 4.6 million tonnes just three years ago. Yusopov concluded that, "South East Asia's growing appetite for meat and shortfalls in local production will create a corn market bigger than that of South Korea or perhaps even Mexico within a few years."
China turns tail on its official corn trade position?
However, from my perspective as a grain analyst, the most fascinating news comes from the China National Grain and Oils Information Centre (CNGOIC). As someone who regularly attends Asian grain conferences, I have repeatedly heard CNGOIC presentations state that China will remain self-sufficient in feed grains at one industry event after another. Yet, in late October, CNGOIC suddenly turned tail, stating that China will need five million tonnes of corn imports in the year to come.
While this is a conservative estimate compared to US Grain Council estimates of up to 10 million tonnes, it represents a profound reversal of this  government body's long-standing official position: As recently as June, Weilu Yang, CNGOIC's deputy director, told the International Grains Council that was it was "improbable" that China would ever become dependent  imported corn.
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