Demand is good

If the latest crop projections hold, the United States will set yield records in all three major crops: corn, soybeans and wheat. In a world of ever increasing yields, you might think this is a semi-regular event.

Not true. This last happened 37 years ago, in 1979. Record production leads to record supplies and decade low prices in grains. The news is bleak. We need a positive spin and I found it.

Demand is good.

We start with corn because corn is king. Corn exports in the current crop year are projected to easily top 2 bb, a level last seen in the 2005-07 period. Corn used in ethanol production will set a record even though the growth rate is nothing like it was in the 2000s.

Finally, there is feed use of corn – the largest piece of corn demand. Feed use of corn is projected to reach the highest level since 2005. While that may not sound impressive, ethanol production has messed with our historical perspective of feed demand, as 25% of the corn used to produce ethanol returns to the feed market as DDG.

Go ahead and be impressed by a 15 bb corn crop – we should be equally impressed by corn demand that nears 14.5 bb, and 16% higher than just five years ago.

Soybean demand is also good. Crush demand continues to grow. It may not be spectacular growth but it is consistent, and 2016 is projected to be our third consecutive year of record crush, something that hasn’t happened in more than a decade. Export demand growth does approach spectacular (see chart) and, if current projections hold, we are a rounding error away from 2 bb of soybean exports.

It was just 20 years ago when crush demand was roughly twice as big as export demand. Today they are nearly equal, with exports holding a slight edge. More than 4 bb of soybeans will be produced this year, and that is a record big crop. However, more than 4 bb of soybeans will be consumed too, and that is record demand.  

Alas, wheat – demand here is not so good. Food use grows at a rate consistent with the population, about 1% per year. Exports are troubling. U.S. wheat exports first topped 1bb in 1972, but this year we will fail to reach 1 bb for only the tenth time in 45 years.

Worse yet, this is projected to be our third consecutive year with wheat exports below a billion bushels. That hasn’t happened since 1969-71. Competition is tough and getting tougher in the world of wheat, as Russia, Ukraine and Kazakhstan have emerged as consistent competitors.

Record crops and low prices have hidden the good news in demand for corn and soybeans. If we had produced a 165 bpa corn crop or a 46 bpa soybean crop – in both cases, near trend-line yields – we would be singing a completely different tune about world and domestic grain prices. But we will produce a record crop and that puts the bears in control. Look for rallies to sell.

Data source: United States Department of Agriculture and the Foreign Agricultural Service

Chart caption: This simple chart shows why the growing demand for soybeans from China may be the greatest story in the last 25 years.