Jon Scheve
October 26, 2020
Two months ago, farmers hoped corn prices would stay above $3.00. 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, leaving many to think the season high was already hit. 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 more bushels from around the world than previously estimated just 2 months ago.
Why? What Happened?
With China being the 2nd largest corn producer in the world after the US, this seems unusual. Plus, there were reports 2 years ago that China was working through stocks that were 6-7 years old in storage facilities.
It is now believed that either China's usage the past two years is more than previously estimated or yields have been lower (or both). This uncertainty makes it challenging for the market to accurately assess why demands needs are potentially much larger now.
Some also 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 normal 5-7 MMT yearly imports), 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 4 sources large enough –Ukraine, Brazil, Argentina and the US.
Ukraine had some dry weather this past summer, so harvest production was lower than normal. Market participants believe they could provide 4-8 MMT.
Brazil could sell some bushels but those won’t be available until after their 2nd summer harvest next year. That might be 1-5 MMT of corn eventually.
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 Nina is currently predicted to peak in January. In 8 of the last 13 January La Nina 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 US?
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 Nina impacts Argentina’s yields, then the US 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. Also, despite La Nina reducing yields the last 5 times, it’s still not a guarantee it will occur this year.
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 next spring could be bullish prices if carryout falls to 1.6 billion bushels.
The US’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 US dollar are always shifting. A low dollar makes it easier for other countries to import US products. However, last January the Brazilian Real lost 50% of it’s value compared to the US dollar in just over one month. That caused US 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 US and Europe. An increase in lockdowns or 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. However, a change in US yields or harvested acres from current estimates could also still impact prices in either direction. Ultimately it likely comes down to if China keeps importing more corn.
Also, there are still some unanswered questions about what higher corn prices could do to the feed sector. Substitutes or other ingredients could replace some corn demand. Ethanol production seems steady, but if prices make it difficult to turn a profit or lockdowns slow demand, it could reduce corn demand. 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.
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