Kub's Den

Which country produces the second-largest corn crop in the world? No, it's not Brazil, although the recent corn futures rally has been a good reminder of Brazil's importance. Concern about dry weather for the pollinating and developing safrinha corn crop in Brazil justifiably influences the outlook for global corn prices, given that Brazil is the second-largest corn exporter in the world, contributing about 60% as much corn to the global trade as the United States does. But producer? No. Brazil produces less than a quarter as much corn as the United States.

The second-largest corn producer grows nearly as many acres of corn as the U.S., although its fields tend to be smaller and less efficient at pumping out bushels per acre. It is China -- a country that has already been front-of-mind for the grain markets. Its insatiable demand for soybeans will persist, whether tariffs are placed and whether U.S. farmers will be allowed to fulfill that demand.

But let's not forget that China's demand for corn is just as insatiable. Typically, it meets most of its demand with domestic production and carryover stocks. Since this is very much the season for planting corn everywhere in the Northern Hemisphere, this is also the season for worrying about how well China can meet its own corn demand in the forthcoming marketing year.

As a countrywide policy, in recent years China has been aiming to encourage greater soybean acreage at the expense of dominant corn acreage, hoping to drive down corn plantings to something like 82 million acres (ma) by 2020. Inconveniently for that oilseed plan, China's domestic end users of feed grains still really want the stuff and are willing to pay for it. The rally in corn futures that happened here in the U.S. between January and March also occurred for the corn futures traded on the Dalian exchange in China, taking the new-crop September contract to a high of 1,807 renminbi per ton on March 6 (equivalent to about $7 per bushel), right at the time when planting intentions were being considered and inputs were being purchased. Therefore, for individual Chinese farmers planting row crops right now, the countrywide policy encouraging oilseed planting may not be so compelling. Corn is expected to be the more profitable crop despite increased subsidies for planting soybeans.

Here in the U.S., we're familiar with a soybean-to-corn price ratio that hovers somewhere above or below 2.45 to 1. When the price ratio is larger than that -- as it has been for most of 2018 -- it suggests that growing U.S. soybeans will be more profitable than growing U.S. corn. When the ratio is smaller than that (like it is now since new-crop soybean futures have collapsed 4% off their contract high) it implies growing U.S. corn will be more profitable than growing U.S. soybeans.

New-crop futures for corn and soybeans traded on the Dalian exchange in China show a similarly reliable historical average. We might say that if the price of soybeans is more than 2.2 times the price of corn in China, it motivates more soybean planting, and if it's less than 2.2 times the price of corn, it motivates more corn planting. It's a little curious that their equilibrium price ratio is lower than the U.S. soy-to-corn price ratio. Their corn-to-soybean yield ratio is almost identical to the U.S. -- corn tends to produce 3.6 times as many bushels per acre (bpa) as soybeans in both countries (figure 98 bpa corn and 27 bpa soybeans in China versus 177 bpa corn and 49 bpa soybeans in the U.S.). But the price ratio must also reimburse the input costs as well as the yield prospects, and the input costs are understandably different between the American high-technology strategy and the Chinese method.

In both cases, the early 2018 soybean rally -- driven by concern about the Argentinean soybean crop -- caused both the U.S. and the Chinese soy-to-corn new-crop price ratios to climb into levels that might have motivated the Northern Hemisphere's two biggest row-crop producers to favor soybeans. Corn futures in China haven't yet retested their March 6 high, but in the ratio showing the comparative advantage between soybeans and corn, Chinese corn prices have nevertheless reaffirmed their bullishness. Recent sales from the state-owned corn stockpiles have been another demonstration that domestic corn prices in China have been uncomfortably hot.

So far, the planting weather in China's major corn-growing regions has been similar to our own -- a few spots where there has been excess rain, but mostly dry weather that will allow the seed to be placed favorably into the soil, to wait for better moisture in the coming weeks. There is no specific reason yet to worry about the supply of 2018 Chinese corn meeting its potential.

But here's another trivia question for you: which country generates the second-largest corn demand in the world? That's right -- China, which uses three-quarters as much corn as the U.S. does. If that is set to continue -- and all indications from their eager domestic feed grains end users suggest that it is -- then global grain prices may have a sustainable, demand-driven reason to rally, alongside any supply shocks that may occur to the developing Brazilian crop and/or the newly-planted Northern Hemisphere crops.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub

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