China, Brazil and The Future for U.S. Corn

It’s hard to imagine the world running short on corn when you consider the massive size of the U.S. corn crop. The U.S. corn belt, the granary to the world, sweeps across at least six Midwestern states, often covering about 90 million acres of planted area.

Thanks to research, corn yields are staggeringly high — typically more than 170 bushels per acre — and is used in a mind-boggling array of products, including to fatten livestock, as well as to make high fructose corn syrup, ethanol, and plastics.

As uses for the crop grow, so does demand, in the United States and in key markets around the world. But the number of acres American farmers are devoting to corn is under pressure this year, while weather in South America is only adding to the tensions in the market.

“Adverse weather in South America and lower planted acres have been pushing corn prices up along with a huge growing demand base for Chinese corn-based ethanol,” says Shawn Hackett, a frequent commodity commentator and president of Hackett Financial Advisors.

Will Corn Pop?

Corn futures strengthened in the first half of the year, with prices holding in and around $4 a bushel. Talk of a trade war between China and the United States, and uncertainty over NAFTA has taken some wind out of its sails. Hackett believes a weather scare in the United States, along with the woes in Brazil – the world’s second largest exporter of the grain — could easily push prices above $5 a bushel.

Other analysts echoed the sentiment that corn prices could face upward pressure in the months and years ahead. A Barron’s article in April caused a stir when it envisioned the price doubling to $8 a bushel over the next few years, a perch not seen since 2012, when a severe drought hit the U.S.

“An unusual confluence of factors could propel prices higher over the next couple of years,” Barron’s suggested. “These include declining output, an ethanol-led demand surge in China, and likely brutal weather.”

All the talk of strong demand and constrained supply is being felt in corn futures markets. Open interest – the number of open futures positions at a given time — surged throughout May and June 2018, topping a record 2 million contracts on June 6 at CME Group. Corn is a 141-year-old contract, but the ten highest all-time open interest levels were racked up in June.

Open interest is a closely watched way of measuring the infusion of money into a market. A rising flow of open interest usually reflects more hedging.

A key demand driver for corn in the medium term is China’s plan requiring that its gasoline include 10 percent ethanol, which is made from corn. Barron’s estimated China could need another 36 million tons of corn a year to make ethanol. And this move comes at a time when China’s corn production is on the wane after elimination of a government price support system.

Whither the Corn Clash

Two years ago, Bloomberg posted an article outlining a possible corn clash between the United States and Brazil, where the two corn powers would battle for market share amid abundant supplies.

Today, Brazil and Argentina are suffering through a prolonged drought, imperiling prospects for corn harvest. Brazil corn production is expected to fall 12 percent to 87 million tonnes from last year, according to U.S. Department of Agriculture data. Yield per acre estimates was slashed 9 percent from 2017.

American farmers are facing their own challenges in 2018. They battled an unusually long, cold spring as they struggled to get the crop in the ground. The USDA in June estimated that 89 million corn acres were planted in 2018, down 1 percent from 2017.

Meanwhile, domestic demand for corn is consistently strong, analysts say, which pares what’s left over for export. As a result, corn ending stocks are under siege — Rabobank forecasts stocks will fall by 14.5 percent this year.

Farmers Locking in Prices

All this is bullish for prices in the medium term. “We are going through this cycle where farmers have suffered the last several years and we’ve been watching acreage overall contracting,” says Sterling Liddell, vice president and senior global analytics specialist for RaboResearch.

Hackett, the analyst, believes commercial corn buyers are keeping a close eye on the market and could move early to lock in lower prices, especially if the Brazil crop comes up short as many expect.

“I think the market is waiting to see if Brazil is going to deliver or not,” he says. “If it’s pretty clear that they’re going to come up short I do not think the buyers are going to wait around for next year. They’re going to want to get ahead of the curve.”

Brazil production, according to the latest USDA government forecast, is expected to fall 10 percent in the current marketing year to 89 million metric tons, mainly due a reduction in the planted area and a return to average crop yields.

Brazil’s fields devoted to corn are expected to shrink to 16.4 million hectares from 17.6 million the previous year. The USDA noted that the planted area for corn for its first crop of the year has been under pressure from farmers switching to soy.

A lot may depend on how Brazil weather and a fluid trade situation plays out.  Nevertheless, market players are keeping a watchful eye as the pieces of the puzzle slowly fall into place.

Russell Blinch has extensive experience writing about commodities, energy and the environment. His work has appeared in numerous outlets such as the Guardian, DeSmogBlog, Huffington Post, Reuters and at his own site, copycarbon.com. Russell was previously a senior editor with Thomson Reuters where he wore many hats—correspondent, bureau chief, and specialist editor – while being stationed in Ottawa, San Francisco, Singapore, Washington, DC, and Toronto.

Additional Recent Articles in Commodities