China purchases boosting corn prices

By Jon Scheve, Superior Feed Ingredients, LLC

Two months ago, farmers hoped corn prices would stay above $3. Two weeks later, many feared $3.50 would be the high before harvest. One month ago, corn hit $3.75 before rolling back to $3.60 and many felt the high for the season might have been posted. Then Friday, corn traded to $4.20, leaving everyone questioning where the top will be.

What is causing this?

An unexpected increase in China’s supply needs is a major reason. For the last 30 years, China never imported more than 7 million metric tons (MMT) per year. With 1 MMT equaling about 40 million bushels, that’s equal to around 280 million bushels.

However, in the last 2 weeks, reports suggest that China will need to import at least 30 MMT over the next year to maintain supply needs. That would be 1 billion bushels from around the world more than estimated just 2 months ago.

With China being the second largest corn producer in the world after the U.S., this seems unusual. Plus, there were reports 2 years ago that China was working through stocks that were 6 to 7 years old in storage facilities.

It is now believed that usage in China the past year or two have been more than previously estimated or that yields have been less than thought. This becomes a difficult job for the market to try and assess and why we are probably looking at potentially larger demand needs now.

Then there are those who believe that excessive summer rain may have reduced yields by 10%. If China usually produces about 250 MMT per year, a 10% reduction would be 25 MMT. So, with that reduction and a normal yearly import of 5 to 7 MMT it’s easy to arrive at the 30 MMT import estimate some are planning for this year.

Where can China source an additional 25 MMT or 1 billion bushels of corn?

There are only four sources large enough — Ukraine, Brazil, Argentina and the U.S.

  1. Ukraine had some dry weather this past summer, so harvest production was lower than normal. Market participants believe they could provide 4 to 8 MMT.
  2. Brazil could sell some bushels but those won’t be available until after their second summer harvest next year. That might be 1 to 5 MMT of corn eventually.
  3. Argentina has several issues that could keep them from supplying around 10 MMT of corn to satisfy China’s increased demand needs this year:

• Argentina may be facing inflation and/or debt defaults, which may force farmers to hold their grain in bins as a hedge against currency issues.

• La Niña is currently predicted to peak in January. In 8 of the last 13 January • La Niña weather events, there was a major production hit. In the last 5, it was around a 20% yield reduction.

• Argentina usually produces around 50 MMT or 2 billion bushels. A 20% yield hit would be 10 MMT, or 400 million fewer bushels of corn available for consumption around the world.

What does this mean for the U.S.?

The USDA previously estimated 7 MMT in exports for China and arrived at a 2.16-billion-bushel carryout in their last report. Now, many are suggesting at least 3 MMT more exports will be needed (i.e. 10 MMT total), which would reduce carryout to around 2 billion bushels.

This means that if China continues to increase imports and La Niña impacts Argentina’s yields, then the U.S. may be the only location available to export an additional 400 million bushels. This could reduce carryout to only 1.6 billion bushels.

What would this mean for corn prices?

That is the billion-dollar question. There are still so many variables that could impact prices.

  • The market seems to have quickly factored in Argentina weather risk. However, that potential drought impact is still 3 months away. Despite La Niña reducing yields the last 5 times, it’s still not a guarantee it will occur.
  • Some western Corn Belt farmers have subsoil moisture concerns, which may or may not be replenished by next year’s planting season. Dry weather this winter and continued into next spring could be bullish prices if carryout falls to 1.6 billion bushels.
  • The U.S.’s final national yield average is still uncertain. It seems unlikely that yields will change dramatically going into the final yield report in January, but a change in either direction would have a big impact on prices.
  • Global currency values compared to the U.S. dollar are always shifting. A low dollar makes it easier for other countries to import U.S. products. However, last January the Brazilian Real lost 50% of it’s value compared to the U.S. dollar in just over one month. That caused U.S. soybean prices to drop quickly, because they became harder to sell overseas.
  • COVID uncertainty continues to plague the world, as another wave is spreading across the U.S. and Europe. An increase in lockdowns or the potential for contracting economies are potential hazards to prices.
  • There have been tremendous amounts of money “dumped” into global economies during the past 8 months from stimuluses around the world. Several market analysts suggest this could increase inflation, which should be positive for commodity prices.

Bottom line

Corn prices could increase if Argentina remains dry. A change in U.S. yields or harvested acres from current estimates will still have big impacts on prices. Ultimately it likely comes down to if China keeps importing more corn.

There are still some unanswered questions about what higher corn prices could do to the feed sector. There is always a chance that substitutes, or other ingredients replace some corn demand. Ethanol production seems steady but if prices make it difficult to turn a profit or lockdowns slow demand it could mean a drop in demand for corn. The cure to high prices is high prices.

It’s interesting how quickly many in the trade have shifted to a more bullish stance. The same thing happened in 2019 when everyone was sure prices would hit $5, until they didn’t. And the same thing happened when prices hit $3.20, everyone was convinced sub $3 would happen, until it didn’t.

It’s still 2020 — anything could happen.

Please email jon@superiorfeed.com with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results.

By Jon Scheve, Superior Feed Ingredients, LLC

Two months ago, farmers hoped corn prices would stay above $3. Two weeks later, many feared $3.50 would be the high before harvest. One month ago, corn hit $3.75 before rolling back to $3.60 and many felt the high for the season might have been posted. Then Friday, corn traded to $4.20, leaving everyone questioning where the top will be.

What is causing this?

An unexpected increase in China’s supply needs is a major reason. For the last 30 years, China never imported more than 7 million metric tons (MMT) per year. With 1 MMT equaling about 40 million bushels, that’s equal to around 280 million bushels.

However, in the last 2 weeks, reports suggest that China will need to import at least 30 MMT over the next year to maintain supply needs. That would be 1 billion bushels from around the world more than estimated just 2 months ago.

With China being the second largest corn producer in the world after the U.S., this seems unusual. Plus, there were reports 2 years ago that China was working through stocks that were 6 to 7 years old in storage facilities.

It is now believed that usage in China the past year or two have been more than previously estimated or that yields have been less than thought. This becomes a difficult job for the market to try and assess and why we are probably looking at potentially larger demand needs now.

Then there are those who believe that excessive summer rain may have reduced yields by 10%. If China usually produces about 250 MMT per year, a 10% reduction would be 25 MMT. So, with that reduction and a normal yearly import of 5 to 7 MMT it’s easy to arrive at the 30 MMT import estimate some are planning for this year.

Where can China source an additional 25 MMT or 1 billion bushels of corn?

There are only four sources large enough — Ukraine, Brazil, Argentina and the U.S.

  1. Ukraine had some dry weather this past summer, so harvest production was lower than normal. Market participants believe they could provide 4 to 8 MMT.
  2. Brazil could sell some bushels but those won’t be available until after their second summer harvest next year. That might be 1 to 5 MMT of corn eventually.
  3. Argentina has several issues that could keep them from supplying around 10 MMT of corn to satisfy China’s increased demand needs this year:

• Argentina may be facing inflation and/or debt defaults, which may force farmers to hold their grain in bins as a hedge against currency issues.

• La Niña is currently predicted to peak in January. In 8 of the last 13 January • La Niña weather events, there was a major production hit. In the last 5, it was around a 20% yield reduction.

• Argentina usually produces around 50 MMT or 2 billion bushels. A 20% yield hit would be 10 MMT, or 400 million fewer bushels of corn available for consumption around the world.

What does this mean for the U.S.?

The USDA previously estimated 7 MMT in exports for China and arrived at a 2.16-billion-bushel carryout in their last report. Now, many are suggesting at least 3 MMT more exports will be needed (i.e. 10 MMT total), which would reduce carryout to around 2 billion bushels.

This means that if China continues to increase imports and La Niña impacts Argentina’s yields, then the U.S. may be the only location available to export an additional 400 million bushels. This could reduce carryout to only 1.6 billion bushels.

What would this mean for corn prices?

That is the billion-dollar question. There are still so many variables that could impact prices.

  • The market seems to have quickly factored in Argentina weather risk. However, that potential drought impact is still 3 months away. Despite La Niña reducing yields the last 5 times, it’s still not a guarantee it will occur.
  • Some western Corn Belt farmers have subsoil moisture concerns, which may or may not be replenished by next year’s planting season. Dry weather this winter and continued into next spring could be bullish prices if carryout falls to 1.6 billion bushels.
  • The U.S.’s final national yield average is still uncertain. It seems unlikely that yields will change dramatically going into the final yield report in January, but a change in either direction would have a big impact on prices.
  • Global currency values compared to the U.S. dollar are always shifting. A low dollar makes it easier for other countries to import U.S. products. However, last January the Brazilian Real lost 50% of it’s value compared to the U.S. dollar in just over one month. That caused U.S. soybean prices to drop quickly, because they became harder to sell overseas.
  • COVID uncertainty continues to plague the world, as another wave is spreading across the U.S. and Europe. An increase in lockdowns or the potential for contracting economies are potential hazards to prices.
  • There have been tremendous amounts of money “dumped” into global economies during the past 8 months from stimuluses around the world. Several market analysts suggest this could increase inflation, which should be positive for commodity prices.

Bottom line

Corn prices could increase if Argentina remains dry. A change in U.S. yields or harvested acres from current estimates will still have big impacts on prices. Ultimately it likely comes down to if China keeps importing more corn.

There are still some unanswered questions about what higher corn prices could do to the feed sector. There is always a chance that substitutes, or other ingredients replace some corn demand. Ethanol production seems steady but if prices make it difficult to turn a profit or lockdowns slow demand it could mean a drop in demand for corn. The cure to high prices is high prices.

It’s interesting how quickly many in the trade have shifted to a more bullish stance. The same thing happened in 2019 when everyone was sure prices would hit $5, until they didn’t. And the same thing happened when prices hit $3.20, everyone was convinced sub $3 would happen, until it didn’t.

It’s still 2020 — anything could happen.

Please email jon@superiorfeed.com with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results.

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