The pace at which the corn export program has started has caught the attention of traders and analysts across the industry. Considering the start is over 234 million bushels or just under 6 million metric tons higher than last year at this time through the first seven weeks of the marketing year and the fourth largest for this week going back over 30 years, there is good reason they are noticing.
While I was expecting a strong pace to exports in the year ahead, which was the foundation to my thesis on why I was bullish corn back in September, even I am surprised by the surge in coverage seen of US corn by global buyers.
What is most interesting is this surge in buying is taking place in the face of a narrative still trying to push that the global supply of corn is more than ample or even burdensome. In addition, the apparent lack of Chinese demand is still being pointed to as a reason for bearishness, further bringing with it questions about what export demand for US corn looks like in the months ahead.
This week I want to look at the start of the corn export program, the potential adjustments we could see in global balance sheets and what it could all mean for price direction as we move forward.
Global Supply Adjustments
While yes, on paper the world supply is ample, if you look at the way cash markets are trading around the world and listen to local traders and analysts, the USDA is likely overstating production and exportable supplies in Brazil, Ukraine, Russia and the EU. Other adjustments are likely to be seen for a handful of other nations in the months ahead as well, as poor weather and poor margins cut into production across both hemispheres over the last few months.
Breaking it down by country, we are seeing some interesting shifts in Brazil’s cash corn market as smaller production, larger on farm storage, greater domestic demand and logistical issues getting to port have reduced the country’s export program. Brazil’s corn exports since the start of January are down over 17.5 million metric tons or 689 million bushels from a year ago. When looking ahead over the next several months, traders say the flow of corn into export channels is likely to remain reduced, with 5-6 million metric tons or around 200 million bushels of corn available for world buyers until May at the earliest.
To put this into perspective, last year at this time Brazil still had 8 million metric tons of corn or 315 million bushels already committed for shipment in November and was undercutting the rest of the world on price as Ukraine worked to sort out its new corridor.
Argentina has upped the bushels of corn they have sent into the world market versus a year ago in a reasonable way. A recovery in production from the year prior and less available supplies out of Brazil has helped to send business Argentina’s way, with shipments up 8 mmt or over 300 million bushels since the beginning of the year.
However, the bulk of Argentina’s exportable surplus has been spent, with local traders estimating around 5 million metric tons or just under 200 million bushels left to ship until new crop supplies enter the pipeline. When it comes to those new crop supplies, there is a wide range of estimates on what Argentina’s planted area will look like after a disease spread by leafhoppers decimated crop potential last year. Some believe Argentina production could come in below last year on planted area alone, with weather models pointing towards the possibility of drier than normal conditions for much of the growing season—likely keeping farmers and commercials holding a touch tighter to corn than what we may typically see.
When it comes to South America, it is likely we will hear a lot about their corn supply, with much of the analyst focus placed on the large new crop potential in both Brazil and Argentina. While they may be right with reasonable weather, it is important to remember the availability of the earliest new crop supplies is still months away.
Ukraine battled one of its hottest and driest summers on record, as did its neighbors, cutting into the regional supply in a big way. Local traders estimate Ukraine’s exportable supply could be nearly cut in half from a year ago, with some saying we could see only 15 mmt of exports vs last year’s 30. Even if it is on the higher end of local estimates, the USDA is likely overstating Ukraine’s exports by 3 mmt or 118 million bushels at the 23 mmt they are currently projecting.
As mentioned, it is not only Ukraine that saw reduced production from heat and dryness, their neighbors in Eastern Europe and across Russia saw similar conditions trim their production and cause quality issues as well. Speaking of quality issues, France and its neighbors spent the year dealing with too much moisture, resulting in a wide range of quality problems, with issues carrying over well into harvest.
Other Shifts
It’s not just adjustments to global supplies that are likely to keep corn exports stout, we are seeing some interesting shifts in global demand leading to a change in some market structures. India is likely to shift from a 3-4 million metric tons a year exporter to an importer this year. And while 1 million metric tons of imports is not much on paper, the upwards of 5 million metric tons of reduced available supply means their traditional buyers are looking elsewhere.
South African exports are likely a million metric tons overstated in last month’s USDA estimate if you ask local traders, impacting shipments into their neighbors as well.
Increased demand for corn to be fed or turned into biofuels is not only supporting Brazil’s cash corn market, it is creating some seemingly unexpected competition that exporters were not anticipating in several parts of the world, making the US the greatest supplier of consequence for the next few months.
What About Chinese Demand?
Many traders want to say a lack of Chinese buying is bearish, with some arguing they simply will not come to the US for corn. For me, when looking at the overall supply situation across the world, a return of China to the market would actually be a bullish catalyst, especially if it comes coupled with any type of production issue in South America.
At this point when looking at the pace of buying, the number of bushels that need to be bought and the availability of supplies elsewhere, I believe we will easily meet if not exceed the current USDA export projections (without some major economic shock or a Black Swan event) even without any type of significant Chinese buying. However, if China were to come back into the market much before May, it is very likely they will have to source the bulk of their bushels from the US.
Obviously, what that means to the balance sheet overall would depend on how aggressive they are as buyers but even if they came in at the lower end of expectations, we could easily add around 400 million bushels of corn export demand to the US balance sheet. While at face value, a reduction in Chinese demand of 7-9 mmt from current estimates would be bearish, it is likely much if not all that lost demand would be soaked up by the production reductions needed to be seen elsewhere. This keeps the overall global ending stocks situation unchanged even with big adjustments lower to Chinese demand.
However, if we were to see them approach the market in a more aggressive manner, things could get very interesting very quickly as the rest of the world is short the physical it seems, and supplies are nowhere near as plentiful as seen the last couple of years.
What Does It Mean?
While it is possible the surge in corn buying could be driven by concern over what happens after the election, it is more likely the significant uptick in demand we are seeing is being driven by pure economics and smart trading than anything else.
The market has been sending signals to the world market to start producing less corn while also using more, and the market has listened—with the help of Mother Nature of course. While no one can predict the future, I would say it is very likely we continue to see stout demand for US corn from world buyers with or without China’s presence, with a return by China into the world’s corn market a far more bullish catalyst than many currently expect.
Next week we will discuss the election and what it’s likely to mean for the grain markets. As always, don’t hesitate to reach out with any questions! Have a great week
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
