Inside The Market

Supply Inequalities Return to Crops

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In the season of 1986–87, U.S. ending stocks of corn were at 66% of annual use, 45 percentage points above the 21% ending stocks-to-use ratio for soybeans. The mountain of corn in relation to soybeans stands as the widest supply disparity those two crops have seen in at least four decades.

Now, some 33 years later, it appears the shoe is on the other foot, as USDA expects a 25% stocks-to-use ratio for U.S. soybeans compared to a 14% stocks-to-use ratio for corn. The 11-percentage-point difference doesn’t sound as dramatic as the 1987 example, but keep in mind this will be only the fourth season since 1980 that the soybean ratio has exceeded the corn ratio. The 11-percentage-point difference is the largest disparity in favor of soybeans that supplies have seen since at least 1980.

What does this mean for the corn and soybean markets? If you’ve ever taken a course in economics, you know that economists are all about equilibrium. Market supplies and prices get out of whack for a variety of reasons, but it’s the incentives that bring supplies and prices back to equilibrium. Sometimes, the process takes longer than we would prefer, but time tends to restore balance.

Currently, we see two large disruptors at work, starting in 2018 with the U.S. trade war against China. The Chinese response of its own tariffs included a 25% fee on U.S. soybean imports and has hurt U.S. exports. In 2017–18, China bought more than 1 billion bushels of U.S. soybeans. Exports to China in the current only total 233 million bushels as of mid-May, while 257 million bushels of additional sales are waiting.

The result has been a dramatic increase in U.S. soybean ending stocks, now estimated by USDA near a record high 1 billion bushels.

Meanwhile, the world economy has shown improvement the past few years, and USDA is expecting world corn demand to be 17% higher this season than where it was three years ago. The U.S. is still the world’s largest exporter of corn, and U.S. demand has benefited from the upward trend in world demand.

The second disruptor threatening to increase the current supply imbalance is this year’s poor planting weather. Extraordinarily wet and cool conditions have confined planters to machinery sheds. Actual corn plantings will likely fall well below USDA’s early estimate of 92.8 million acres.

USDA’s acreage estimate is set to be released on June 28, but given this year’s unusual conditions, a more credible estimate may not come until later.

Spot soybean prices at the end of May are currently trading at 2.08 times the spot price of corn and well below the 10-year average of 2.54 times corn. Two disruptors--one an act of government and the other an act of nature--are likely to keep corn prices high relative to soybeans for months to come. Equilibrium will have to wait.

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