Almost exactly a year ago, I was in studio discussing USDA’s long-term projection numbers and how a 3-billion-bushel corn carryout would be a likely conversation piece at some point during 2020. The onset of COVID-19 only reinforced that sentiment as the industry became acutely aware of demand destruction from the loss of corn for ethanol, as plants went offline this past spring.
But, like history has proven time and time again, low prices cure low prices.
When the ethanol industry temporarily faltered, our export program quietly made up for that loss of demand, and then some.
Add the lack of late summer moisture and the derecho in Iowa to take some meaningful production offline and now we’re looking at over a billion bushel swing in corn carryout expectations in less than a year’s time.
The story is much the same for soybeans with recent carryout estimates for next week’s WASDE report now down nearly 80% from the highest carryout estimates for last year’s crop; how quickly things change.
Future export outlook
The future trajectory of U.S. exports will be affected greatly by the evolution of South America’s crop over the next several months. As of right now, our expectation of a strengthening La Niña would lend credence to the idea that additional exports to compensate for production losses south of the Equator will eventually come to fruition.
This could keep our corn export program strong into spring while Brazil focuses on shipping soybeans. The U.S. soybean export program will likely see a somewhat abrupt end as Brazil’s crop becomes available, regardless of the size of their crop. Recent reports suggest U.S. soybeans have been sent to Brazil and it should not surprise anyone to have Brazil return the favor before the end of our marketing year. Our tightening domestic stocks will likely create the scenario we have seen previously where soybean are imported into the east coast via Brazil, especially if Argentina’s soybean crop suffers and world soybean meal demand creates the need for strong U.S. crush to manage the shortfall.
China corn imports jump
The U.S. Ag Attaché to China recently indicated China’s corn imports would be 22 million tonnes versus the 7 million USDA is currently using. Frankly, this is already known in the trade; we feel that 8-10MMT has been sourced elsewhere, while the amount the U.S. has on the books is closer to 11MMT.
If that is the case, the demand revisions short term likely will not be enough to bring carryout down to the numbers I’m about to dive into. We might need South America’s crop to falter to pick up additional export demand later in the marketing year for the USDA to acknowledge it on its balance sheet.
We have been asked just how bullish the scenario could ultimately be for this crop year.
Each additional 1-million-tonne of exports equates to nearly 40 million bushels for both corn and soybeans, so as far as a hard number to end this thought process, a few million tonne reduction in South America’s crop could easily whittle our corn carryout down to 1.7-1.8 billion bu., assuming that USDA also reduces yield by at least 1bpa for final yield.
Drop yield more than a bushel or see China buy a few million tonnes more and we could be talking 1.5-1.7bb corn carryout.
A problem with South America’s soybean crop will eventually be seen in additional 2021/22 exports; the forecast for La Niña is likely the reason new crop soybean futures have ventured north of $10.
The potential for the biggest change on the balance sheet short term is more likely to come from yield reduction instead of demand. Every 1bpa adjustment to soybean production equates to 80 million bushels of production, so a larger than expected revision can move the needle rather abruptly.
My blog last month mentioned the U.S. Dollar and why inflation could be on the horizon. The next couple of years will be a mish mash of supply versus demand, and whether the inflation some are expecting takes place. A key component of the supply discussion will be how much higher new crop values can move from here as planting decisions are being made. Planting more acres next spring will take the edge off a demand-led bull market, so take advantage of further new crop strength by beginning your marketing ahead of time. The key variable on the demand side for corn is whether or not this is a one and done event for China with strong imports to replenish domestic stocks, or if we can expect to see Chinese demand for corn sustain a gradual increase year-to-year in the same vein as Chinese soybean demand prior to the trade war.
Should that be the case, corn could be in a price expansion environment as the market gets used to the new export demand plateau.
As far as inflation, well, it either happens or it does not.