With fresh seven-year highs scored right ahead of the USDA's February WASDE report, a massive reversal of the charts indicates that a near term top in the grain markets could be in place.

The reversal can be attributed to the fact that Feb WASDE ending stock numbers were not lowered as much as the trade was expecting.  The USDA revised corn ending stocks down to 1.502 billion bushels. The corn for export portion of the balance sheet was revised higher by 50 million bushels to 2.6 billion bushels; this was the only revision on the corn balance sheet revised. The 50-million-bushel revision was less than most in the trade were thinking, including our group.

The reason for our optimistic demand viewpoint was the USDA's own export sales data. Export sales (Old plus New) for the week of January 28^th were a record 296 million bushels, and double the previous record high scored back in 2012.  US exporters have sold 78% of USDA's full-year 2020/2021 corn export forecast as of January 28^th. We believe that the USDA will eventually have to revise the export portion of the balance sheetup by as much as 200 million bushels.

Corn market game changer

This year's game-changer for the corn market is China as they have gone from irrelevant to the dominant force in international corn trade. The USDA has a hard time grasping how many bushels China has on hand and how many bushels they need to import this year.

USDA finally raised China's corn imports to 24 MMT, but we believe this is still too low. Agmarket.Net’s associate, The Grain of Truth, has calculated that the combined U.S. and Ukrainian corn export commitments, along with the estimated share of commitments to “unknown” destinations we feel could be attributed to China, currently totals 27.790 MMT. Some in the trade think it is realistic that China imports could top out at 30 MMT.

It seems like the USDA’s China ending stocks estimate is too optimistic as well. USDA raised the Chinese 20/21 reserves to 196 mt up from their previous estimate of 191mmt. Their opinion is quite different from the UN FAO (Food & Agriculture Organization), which lowered China ending stocks by 54 MMT to 139 MMT earlier in the week.  

China’s corn prices

When you look at corn prices in China, it seems like the FAO has a much better handle on what is going on. When you look back at the corn price in China over the past five years and compare it to the USDA Chinese stocks estimates, you can see something has changed over the past six months. For the most part, China's corn prices traded in a $6 – $8  per bushels range in 2016 when ending stocks were estimated at 223 MMT.  In the next three years, corn stocks were lowered by 1 MMT in 2017, 12 MMT in 2018, and dropped another 10 MMT to 200 MMT in 2019.

Even with these downward stock revisions, the corn price stayed in a $7 - $8 per bushels trading range. We find it interesting in 2020, that USDA lowered the stocks by 10 MMT to 190 MMT, but this time the Chinese corn market has exploded higher, testing the $12 per bushel level earlier in the 2021 calendar year. (Early in the week, the USDA put Chinese stocks at 196 MMT. ) 

We argue this explosive rise in prices indicates that the FAO is much closer to the realistic Chinese corn stocks than the current USDA estimate. The higher prices that they are seeing would also suggest that they are not done buying corn, as it makes sense to think they will keep buying corn until they build back stocks and drive the price back to the price range that the domestic price has been in before the past year's run-up.

Reach Jim at 815-665-0461 or  [email protected] 

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