While the U.S.-China trade negotiations are soaking up all the headlines, we might be ignoring the main driver behind the price declines in corn and soybeans, which is increasing production. USDA's initial take on 2019-20 global corn production is 1.113 billion metric tons, or 44.6 billion bushels (bb). It would also be a 55.8 million metric tons (mmt) (2.197 bb) increase from two years ago. Those numbers are asking the world to absorb a lot of corn. Since China is in the headlines, let's talk about them first.
China wasn't buying much corn from the U.S. prior to the trade fight escalation in the spring of 2018, having already limited imports of U.S. corn, ethanol and DDGs under various anti-dumping and other tariffs in earlier maneuvers. China has recently lost two World Trade Organization (WTO) cases to the U.S. related to violations of WTO rules, but the penalties have yet to be assessed or a collection mechanism established. What we know for sure is that they are buying less than WTO minimum quantities from other countries. They are also the largest corn stocks holders in the world. Based on the 10-year revisions made last fall following the Chinese census, USDA thinks China will be holding a whopping 64.38% of all the surplus corn in the world at the end of the 2018-19 marketing year on Aug. 31.
China can live a long time on their admittedly declining stocks if they avoid major droughts. The rest of the world (except the U.S. and China) has for a long time been a deficit producer/net importer of corn.
So what's the problem? Can't we just ignore China, who hasn't been buying much anyway and sell to the rest of the world? And why does the USDA see U.S. corn ending stocks building to 2.485 bb by August 2020?
Coming back to my original point, world production is ramping up too quickly. In Friday's (May 10) first round of 2019-20 estimates, USDA put Brazilian corn production at 100 mmt for this year and 101 mmt for 2019-20. That would be a two-year increase of 19 mmt or 23% from the drought reduced 2017-18 crop. They have Argentina at 49 mmt for both years, which is a 53% increase from their 2017-18 production. For comparison, Chinese production is seen down 5 mmt over those two years, or about a 2% drop. The U.S. would be up 10.6 mmt or about 2.9% using the current numbers. Adding up the U.S., Argentine and Brazilian two-year changes, we get an increase in output of 46.6 mmt. That is 1.834 billion additional bushels for world buyers to absorb, and ignores Ukraine, Russia, South Africa and some other exporters.
Is world feed use and industrial use growing? Yes. USDA has global corn use at 1.090 billion metric tons for 2017-18, 1.132 billion for 2018-19 and 1.145 billion for 2019-20. That would be a two-year increase of 55 mmt versus the big three (U.S., Argentina and Brazil) exporter production increase of 46 mmt. There is enough buying out there to move all of the extra big three production if you beat the rest of the countries on market share, which is usually accomplished by low prices.
You're thinking "but what about China and the African swine fever outbreak? Aren't they losing a lot of feed demand for hogs?"
The folks at USDA do have Chinese corn use for feed dropping a modest 2 mmt, but they have total domestic use rising 4 mmt in 2019-20 due to starch, ethanol and other uses. Chinese feed use is assumed to increase for poultry and aquaculture, in particular. The pace of herd rebuilding for hogs is also a major question mark when you start looking out to 2020 and beyond.
Our bottom line? The Argentines and Brazilians are currently willing to take lower prices than the U.S. in order to move newly harvested corn into the world market. That's keeping pressure on FOB prices, and is likely to mean slower U.S. corn exports in the September-November quarter than we saw last fall when the previous South American crops were smaller. USDA, in fact, indicated first half exports were likely to be smaller. It is possible to move the inventory, however, and USDA is only cutting their full year export forecast for the U.S. by 630,000 metric tons (25 million bushels) from this year. That's at a $3.30 cash average price, however, versus $3.50 this year.
Opening China up for larger imports would help accelerate the process, whether for corn, DDGs (which would drive more corn feeding domestically) or ethanol. Otherwise, you are back to hoping Mother Nature trims back production somewhere besides your back yard and balances out the equation. The U.S. has seen five years in a row of above trend yields, so there is a bad year in there somewhere. Could the wet weather this spring result in reduced acreage and/or lower U.S. yield for 2019? It's possible, but not a sure thing. Turning hot and dry after the Fourth of July would likely get the market the most excited.
Alan Brugler can be reached at firstname.lastname@example.org
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