This week it’s time to take a bit of a deep dive into corn demand. Corn has had my attention for a while now as the narrative surrounding the market in fundamental discussions hasn’t necessarily felt the same at ground level. I am not going to sit here and argue that production wasn’t there because it was, as there is no one running out of corn anywhere in the world right now due to the lack of availability.
I will argue though that we must take note of the bit of a different vibe that the cash market is giving, with an incredibly quick recovery seen in post-harvest basis and a soybean style spread strengthening that should give any seasoned cash trader or analyst pause to a certain extent.
As we have discussed so many times before, the cash market will tell the truth far before any supply and demand update. USDA projections are a great road map of what to expect ahead of a marketing year but are adjusted according to developments in the physical market once cash trade begins.
Spread strength is an indication we are not moving enough grain into the pipeline to satisfy current demand. Whether that is a sign that the supply is smaller than anticipated, demand is larger than anticipated or both remains to be seen, but with so many thinking the spike in export business is being driven by Trump trade fears, I figure what better time than now than to look at what’s happening when it comes to corn demand.
Global Ethanol Demand
There has been a lot of talk over the last few years about ethanol being a dying industry. Naysayers love to point to the ‘blend wall’ acting as though 10% of the United States’ “dwindling” gasoline use is the only source of demand for ethanol available—something that is wrong on a whole host of levels. Not only are we seeing the amount of ethanol blended into the nation’s fuel supply sitting closer to 11%, we also are seeing a move away from the belief we will see electric vehicles significantly cut into US produced fuel demand.
Global demand for ethanol is also on the rise, with several countries actively working to increase their blend rates. Just this week Japan announced they will work to achieve an e10 blend rate in their fuel by 2030, with an e20 goal by 2040. With Japan an already aggressive corn importer for feed, it is unlikely that we will see a massive expansion in
domestic ethanol production there, likely making the US a supplier of choice in the future, something the US Grains Council is optimistic we will see.
India is another demand center whose appetite for ethanol seems to be ravenous. Officials were able to move their target to reach e20 blending in fuel across much of the country up five years earlier than initially set, with thoughts they will work to target higher rates by 2030. India produces a significant amount of ethanol on its own from molasses, limiting imports of ethanol for domestic fuel use. However, India’s uses for ethanol go well beyond road fuel, with several other industrial, medical and commercial uses also gobbling up supplies. With the spike in domestic demand, we have seen India step in as a large importer of US ethanol recently, with the USDA anticipating India’s ethanol imports will be up at least 50% from a year ago.
Brazil does not want to be left out when it comes to upping their ethanol production capacity, or demand for domestically produced biofuels. The recently passed Fuels of the Future bill pushes for a rapid expansion in demand for Brazilian biofuels, with ethanol blend rates set to move from the current rate of around 25% to e30 in the next couple years, with an eventual target of 35% in the sights of the government. The shift in costs for sugar based ethanol versus corn based has resulted in a major expansion of corn ethanol production across Brazil as well. According to officials, there are currently 22 different ethanol projects proposed across the country, with thoughts we will see domestic corn demand for ethanol production grow another 3-5 million metric tons or 150-200 million bushels in the year ahead.
While ethanol margins are much more compressed than what we have seen recently, with some plants on the cusp of breaking even or even losing money in the short term-- so far it does not appear as though we will see a significant slowdown in corn demand for ethanol here or around the world.
Feed Demand
Friday afternoon’s Cattle on Feed report showed the largest number of cattle on feed in the US for the month of November in over 20 years. I’m not going to pretend to be an expert on feed margins, but from what I am hearing, it is not a bad time to be feeding animals across much of the world.
I do worry a bit about the drop in soybean meal values, and of course cheap wheat and their influence on inclusion rates, but it appears as though feed demand should be solid overall. We have seen a sharp rise in protein demand around the world and the consumer was not convinced by the increase in meat alternatives offered over the last handful of years. With carnivore style diets again on the rise, we should see reasonable support remain under the livestock market without some type of negative economic event, providing solid feed margins in the months ahead for just about everyone.
Are Exports Being Driven by Trade Fears?
Our corn export sales are the fourth largest on record for this week in the marketing year going back 25 years. The jump in purchasing has been seen across the board for the most part, with only China and Canada lower year over year. Many want to say the push for purchasing has been driven by trade war fears, when in my opinion it has been driven by economics and the availability of supply. As mentioned before, demand for biofuels around the world continues to grow, with strong feed margins also grabbing bushels that may have previously gone into export channels.
The sharp increase in domestic demand in Brazil combined with a 15 mmt drop in production from the 2022/23 crop year created a massive hole in the world market. This hole was exacerbated by a jump in storage capacity and low river levels, resulting in significant per bushel losses by Brazilian exporters and a lack of offers into the world market.
Ukraine’s production looks like it will come in 2 mmt or just under 80 million bushels lower than current USDA estimates and down nearly 9 mmt or 355 million bushels from last year. This combined with some of the uncertainty over quality and whether they will be able to ship with ease in the deferred timeframe has pushed some buyers to hedge their bets with US bushels.
Many want to say Mexico is in a hurry to buy US bushels as they intend to restrict imports of GMO corn, something that has been in the headlines for a handful of years now. However, recent moves by Mexico’s new president seem to have clarified their intent, with the desire to protect the 60 plus hybrids of white corn native to Mexico at the heart of the “GMO restrictions.” Recent moves by leadership to limit domestic production of GMO white corn makes sense when one understands the contamination that could come with cross pollination in corn. At this point, it does not appear as though they want to extend the restrictions beyond home grown white corn, leading to a need for continued importation of yellow corn in their feed.
Whether Mexico is front loading their import program however is something that will be only answered in time, though with the economics of importing as solid as they have been, the strong pace is not overly surprising.
The big question when it comes to corn demand is who “Unknown” is and why they are buying as aggressively as they are. The corn export program is nearly 9 mmt or 350 million bushels larger than last year at this time, with the USDA projecting a 32 million bushel year over year increase. Of that growth, Unknown’s purchases are up 5.2 million metric tons or 205 million bushels. The question of who Unknown is seems to be contentious among traders with the assumption it is always China when soybean purchases are made not following through into corn.
Many want to say Unknown is the European Union, which is probably true to a certain extent based on cash markets and trade rumors. However, according to AgTraderTalk, an Illinois based brokerage firm and analytical group, the last time we saw Unknown in this aggressively for corn was in 2020/21 and it ended up being China.
Could Unknown be China now? Of course it could, as I have ventured before, the presence of China in the US elevator chain can make for a blind spot of sorts in trade. As we work to start shipping more of the open book we have, who Unknown is will begin to become clear as destinations will have to be declared at loading.
What Does it All Mean?
In the end, low prices do work to cure low prices with the drop to multiyear lows incentivizing demand growth for corn around the world. Corn’s use in biofuels is likely to grow as well as it becomes a better alternative than sugar cane or other obvious food products and the need to move away from fossil fuels proves great. Its presence in feed rations will likely be maintained as well, providing buoyant demand and local price support.
The million dollar question remains what China does in the year ahead and whether they import 5 mmt, 10 mmt or 20. In the meantime, though, it is likely we will continue to see reasonable buying pace not only of US corn, but of US ethanol, helping to keep price support solid until China’s intent and new crop production in South America becomes clearer. Of course, we cannot ignore the risk we see an escalation in the Black Sea that limits grain movement or new crop production, but so far that remains a Black Swan style event that is difficult to predict.
As always, don’t hesitate to reach out with any questions! Have a great week.
