The grain market bulls had their horns clipped by the USDA last week when the February global supply and demand update failed to deliver the supportive news many had expected. While there were few production surprises, the WASDE report raised more questions than it answered on the demand and stocks side of the equation.
The USDA increased world production for corn, soybeans and wheat, which was broadly in line with market expectations. However, global demand was lower for corn, which was a surprise considering the China appetite, unchanged for soybeans, and dramatically higher for wheat. All this led to tighter ending stocks for soybeans and wheat, but corn stocks defied expectations by posting an increased closing number.
World corn production was increased slightly to 1,134.05 million metric tonne (MMT). It was unsurprising to see no change in this report to Brazil and Argentina’s forecasts of 109MMT and 47.5MMT respectively. Nonetheless, there are still production concerns around dryness in parts of Argentina and delays to the planting of Brazil’s safrinha crop.
Global corn demand was decreased by 2.54MMT to 1,150.52MMT compared to the January report, the exports forecast was up by 2MMT to 185.7MMT and ending stocks are estimated to increase by 2.7MMT to 286.53MMT.
The corn matrix is all about Middle Kingdom demand at the moment. The USDA has been slow to react, but it finally bit the bullet by adding 6.5MMT to its January forecast. This took corn imports to a record 24MMT, better reflecting Beijing’s recent buying spree.
It would be logical to think that US exports would reflect that same market activity. Wrong! The USDA rearranged the furniture somewhat by decreasing demand in the European Union, South Korea, Japan, Turkey and Saudi Arabia, leading to an increase in US exports of only 1.27MMT. Go figure!
China’s domestic feed consumption of corn was raised by 6MMT, which made total sense. But the USDA reduced corn used for food, seed and industrial purposes by 4MMT. This meant 4.5MMT of the additional imports went to ending stocks which increased month-on-month to 196.18MMT, just 4.35MMT lower than 2019/20 closing stocks.
The USDA avoided the hard decisions by leaving China’s opening stocks and production unchanged. Yet several factors point to much lower inventories. Beijing suspended the country’s ethanol blending target in early 2020, citing low corn stocks. China sold 56.84MMT of corn from state reserves in 15 auctions from May to September last year, but the USDA’s stock estimates have failed to reflect the domestic market activity.
There are also serious question marks around the corn production numbers being posted by the Chinese authorities – and adopted by the USDA – after flooding and severe lodging devastated large tracts of the country’s major corn producing regions last year. And why would China need to import more than three times as much corn in the current marketing year as they did in the 2019/20 season with a stocks-to-use ratio of 68 per cent?
The USDA made very few changes on the soybean front, but the balance sheet is already tight, particularly in the US. Global production was unchanged at 361MMT with Brazil at 133MMT, Argentina at 48MMT and the US at 112.55MMT the major contributors. Collectively they make up 81 per cent of global production emphasising the vulnerability of the global balance sheet to production hiccups in those jurisdictions.
Overall demand was steady at 369.84MMT, and worldwide exports were increased by 0.6MMT to 169.69MMT. Almost all of this increase was out of the US where the forecast ending stocks fell to just 3.25MMT. That has the US running on the smell of an oily rag leading up to their harvest, yet sales and export data suggest US exports should be higher. It is looking increasingly likely the US will require imports from South America to bridge the supply gap.
Worldwide ending stocks were down almost 1MMT to 83.36MMT which equates to a fall of 11.5MMT, or 11 per cent, compared to the 2019/20 season and down a staggering 29.5MMT, or 26 per cent, compared to the 2018/19 season.
China remains the front-page soybean story. Demand in the 2020/21 season is unchanged at 100MMT, or 59 per cent of global exports, but many in the trade believe that it will be higher come season end if the current pace of purchases is maintained. The major export suppliers continue to be the US and Brazil with 61.24MMT and 85MMT forecast to be shipped respectively in the current marketing year. That is more than 86 per cent of total global trade.
The USDA pegged global wheat production at a record 773.44 million metric tonne, an increase of 0.8MMT on its January estimate. It called Kazakhstan wheat production 14.26MMT, up 1.76MMT on last month and 2.81MMT higher than in 2019/20. Pakistan output was down 0.5MMT and the Argentine crop was decreased by 0.3MMT.
Still, the USDA continues to ignore the enormous crop just harvested here in Australia, leaving production unchanged at 30MMT. We know it is all about the end game for the USDA when it comes to Australian estimates, but the bulk of harvest was concluded two months ago, and their number is still 5MMT shy of reality.
The big change in wheat was a 9.8MMT hike in world demand. Indian consumption was up 3.5MMT, but the headline change was, you guessed it, China. The demand for feed grains remains strong, and the country’s feed and residual use was raised by 5MMT to a record 30MMT, eclipsing the previous record of 26MMT set in 2012/13.
Additionally, China’s domestic corn prices continue to run at a premium to wheat, encouraging greater use of wheat over corn for stock feed purposes. Auction volumes of old-crop stocks in China have also increased, expanding feed-quality wheat availability with almost 14MT sold in the first five weeks of 2021.
However, the USDA only increased imports by 1MMT meaning 80 per cent of the increase in feed use was taken out of ending stocks. This brought them down by 4MMT to just under 155MMT. That said, wheat imports at 10MMT are almost double those of last season and more than triple the 2018/19 number.
Last week’s WASDE report confirmed several significant themes. China continues to be the driver on the demand side of the global supply and demand equation. Their appetite is massive, and there are no signs it will abate in the near future. On the production side, all eyes are firmly on South America at the moment where consolidation of current production estimates is critical. Any setbacks could quickly spark another market rally, particularly in corn.
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