Lend Me Your Ears

Corn buyers are facing a period of global scarcity that would have seemed dystopic just over a year ago, when plentiful harvests looked set to accumulate amid global Covid-19 lockdowns. Instead, major corn exporter silos lay perilously bare today, with stocks-to-use (STU) at 7%, the lowest level in 25 years and equivalent to just 3.5 weeks of demand. The counter-cyclical sequence of events – price-constrained planted acreage, weather phenomena, and a post-disease import demand surge (230mmt, +13% YOY) led by China – has left the global feed grain market bereft of any buffer and traditional hand-to-mouth buyers reeling from higher prices.

At the center of the global corn shortage – and so much else – are the US and China. With its massive corn holdings, the US is typically the global reservoir of feed grains, exporting one-third of the world’s internationally traded coarse feed grain and holding two-thirds of exporter stockpiles. During the summer of 2020, US corn exporters started receiving unexpected export demand, which ultimately rose by 78% YOY and – combined with low plantings and wind-damaged yields – pushed US STU levels to quarter-century lows of 6%. The purchases came principally from China (26mmt global imports, +342% YOY), which transformed overnight from a modest feed grain buyer into the world’s premier importer. Over the last year China has singlehandedly raised global corn trade volumes by over 10%. China’s recovery from two disease events – African swine fever (ASF) and Covid-19 – accelerated a long-standing structural deficit in corn not accurately reflected in the USDA’s large China corn stockpiles. In rebuilding its decimated hog herd, China rationed domestic corn, reallocated record quantities of domestic wheat and rice stocks to feed, and imported 46mmt of feed grains. Many international buyers watched from the sidelines as US corn ending stockpiles were drawn down 42% in 2020/21. Interestingly, that’s almost the exact rise in CBOT Corn active contract seen during the period – up 43% to USD 5.42/bu. The CBOT Corn price rise is a mirror image of the US corn stockpile decline.

Feed grain consumers should not expect a near-term easing of supply risks. The 2021/22 northern hemisphere corn harvest that starts next week would typically herald greater availability and affordability for consumers. This year, however, the resupply will fall woefully short – and CBOT Corn prices will remain elevated. Indeed, Rabobank sees higher price risk next year before the gradual supply reflation arrives in summer 2023.

US 2021/22 corn production has been hobbled by arable acreage limits (+2% YOY), crop competition (CBOT Soy is up 40% YOY), expanding drought (presently 37% of corn acreage), and the resulting erosion in crop conditions (60% Good-Excellent, 5% below the five-year average). Complicating matters further is Brazil’s recent safrinha harvest failure, its ongoing dryness, and the specter of La Niña’s return that will leave it unable to shoulder its typical 20% share of world corn exports. With the Brazilian pressure release valve unavailable, improvements in Ukraine 2021/22 production (+9mmt YOY) and a deluge of French feed wheat will not provide sufficient relief to feed grain markets. Moreover, a CBOT Wheat-Corn spread of USD 2.00/bu, the highest since January, does not herald a large demand switch from corn to wheat. US 2021/22 corn export sales will see little relief (2021/22 is already one-third committed before the start of the season, vs. a five-year average of 17%), and its ending stockpiles will remain grounded near 1bn bu. A modest increase in US ending stockpiles isn’t foreseen until 2023 at the earliest, and these could easily be 25% below the 2013-2020 average of 1.9bn bu. Much depends on Brazil’s ability to deliver a production rebound in 2022 – both for the domestic demand crop in February and the export-bound safrinha crop in June. An equally important question is whether China’s feed grain import dominance will continue. Despite increased domestic production incentives and historic feed switches, Rabobank expects China’s import demand will remain strong over the coming years.

Exporter corn STU won’t experience any improvement in 2021/22 due to the lackluster harvest in the US and Brazil’s tentative recovery from crop failure. By 2022/23, farmers’ herculean efforts should improve exporters’ STU, though not enough to deliver a return to the seven-year historic average (12%) that comforted consumers and kept CBOT Corn prices largely confined below USD 4.00/bu. The new price curve that has formed for CBOT Corn above USD 5.00/bu befits the lower supply outlook over the next two years. Corn consumers have more pain ahead and may not be fully assuaged until the 2023/24 summer harvest.

In practice, the pain (price) of the world’s primary feed grain, corn – as well as alternatives like feed wheat, barley, and sorghum – has risen to levels that induces demand rationing among consumers. Coarse feed grain import demand (2021/22 seen flat to 1% lower YOY) isn’t being destroyed altogether, but deferred to a later date. As availability grows (and prices weaken) over time, absent consumers will return to meet it. That is why there have been very few large breaks in the one-year CBOT Corn bull market. Over the last three months, hedge funds sold half of their record accumulated length, which certainly eased prices from eight-year highs; for the most part, however, consumers have been accepting fund (and farmer) sales with both hands. As crops deteriorate, hedge funds are re-entering on the realization that this harvest won’t be a panacea.

Arable acreage inelasticity, weather adversity, and irrepressible demand make today’s corn market a challenge for consumers and farmers alike. CBOT Corn’s price curve appears to have settled in its new range of USD 5.00 to USD 6.00/bu through July 2023, reflecting at least a couple of years of farmers’ inability to satisfy consumers and a gradual recovery from an historic imbalance. Rabobank’s forecast is for CBOT prices to trade in the upper half of that range over the next year.