The U.S. corn market recently received a welcome boost from the demand side as China came shopping in a rather big way.
Daily sales announcements of 30.1 million bu. for 19-20 shipment and 23.6 million bu. for 20-21 delivery were made the week ending July 9th. These were then followed by a 69 million bu. sale on July 14th along with a 4.2 million bu. sale on July 15th. The former was the largest daily corn sale since a sale to Mexico in December of 2018.
The recent activity puts the 19-20 Chinese purchase total at about 85 million bushels with outstanding sales on the books for the 20-21 at 146 million bu.
China’s corn stocks
China’s stocks situation and more specifically, the quality of those stocks, have long been a subject of much debate. The latest USDA Supply and Demand report (July) indicated the country was expected to begin the 20-21 marketing year with around 204 million metric tonnes (MMT) (down 3 from the June forecast) of inventory. With this year’s corn crop unchanged from a year ago at 260 MMT and domestic usage expected to expand by 3 MMT to 277, 7 MMT in imports would be necessary to limit the inventory draw-down to 10 million tonnes, to 194.
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The latter matches a recent figure released by the USDA Agricultural Attache to China, although he sees the corn crop some 10 MMT smaller. The China Corn Use/Stocks/Imports graph indicates that since 2011-12, China has been importing between a low of 3 MMT of corn to as much as the 7 million expected in the current year, 2019-20. And USDA has been calling for a similar total in 20-21.
Several points would seem noteworthy, keeping in mind the uncertainty surrounding China’s inventory situation:
- Stock are being drawn down at the rate of about 10 MMT per year recently;
- Interestingly enough, corn production has been reported to be relatively stable, between 260-265 MMT each of the past 5-6 years;
- Domestic use has been exploding, growing at an average of 12 MMT per year since 2014-15;
- The most actively traded corn contract on the Dalian Exchange has been making new highs lately, and closed just short of $8 per bu. today--that’s up nearly 10% since early mid-March;
- China has been selling its state-owned reserve stocks like hot cakes with each auction said to exhaust the offered amounts;
- The market has long debated China’s potential for large corn imports and this would seem to be the year for lift-off in view of the above factors.
China’s corn sources
The market, or at least the USDA through early July, had pretty well been of the opinion China would import 7 MMT this year with the split consistent with what is expected for 19-20: (1) zero from Argentina; (2) a minimal amount from Brazil, possibly 100,000 MT; (3) somewhere between 3.0 and 4.5 MMT from Ukraine; (4) less than 100,000 MT from the smaller origins with (5) the United States making up the difference.
So, if China takes 7 MMT, the U.S. contribution would be 2.3 MMT IF Ukraine supplies 4.5 MMT; our total could go as high as 3.8 if the Ukraine is at the lower end of the above range. However, we have heard some pundits say the import number from all origins “could” be as large as 20 MMT!
The table below illustrates what alternative levels of Chinese corn imports (5, 10, 15 or 20 MMT—top row) along with exports from competing countries (left column in MMT) would mean for U.S. export prospects. The latter is shown in millions of bushels with the potential ranging from a low of just 20 million to the high end of 669 million bushels should China need to import 20 MMT AND competitor shipments total just 3.0 MMT.
Impact on corn prices
What does this mean for U.S. corn prices? Price forecasting is always a risky endeavor but with a 14.9 billion bu. U.S. corn crop and slightly less feed/residual and FSI use than what the USDA is forecasting, we see exports at 2.2 billion bu. with China accounting for 150 of the total and ending stocks at 2.75 billion bu.
The corresponding stocks to use ratio is 19.1% (16.5% in 2019-20 according to the USDA’s latest forecast). That sort of estimate suggests should China take say, another 250 from the U.S. for a total of 400 million bu., the stocks to use ratio would slip to 17.1%. The expected price of December futures on December 1 under the former scenario would be $3.41 and $3.51 for the latter.
New Chinese demand is welcome, but with the U.S. crop looking very favorable, it unlikely to boost futures above $4 per bu. without some winter issues with Brazil’s safrinha corn crop.