Global corn production is forecast to be lower in the coming season, but it is difficult to see values moving significantly higher despite the strong US corn export numbers over the past few months.
The biggest declines in production are forecast for China and the United Sates (US), but these will be partly offset by the larger crops projected for Canada and the European Union (EU).
There are a number of factors in play, which combined, appear to be capping global corn values at the moment.
The US crop is now 84 per cent planted, up from 71 per cent last week.
Sure, there is talk of some areas that have been flooded and may have to be replanted, and yes, some of this area may be switched to soybeans but there are no huge, overwhelming production concerns today.
In South America, corn production is setting new records, with Argentinian production pegged at 39 million tonnes and the Brazilian crop forecast now sitting at 95mt.
Harvesting of the Safrinha (second corn crop) in Brazil is about to commence. A large proportion of this harvest goes into the export market and this will put enormous pressure on the pace of US exports as consumers turn to the cheaper South American options in the second half of the year.
The last factor, is the high clearance rates in China’s grain reserve auctions this month. China recently announced an end to its corn stockpiling program so the sell down was expected, but the quantities sold have been at the upper end of trade expectations.
Last week saw more than 4.5mt cleared from state reserves, but it is the quantities of older season stocks within that total, which have been impressive.
More than 4mt of 2013/14 season corn was offered with 3.56mt sold, a clearance rate of more than 89 per cent.
Since early May the auction process has cleared about 7.5mt of 2013/14 season, more than 1.7mt of 2012/13 season and around 500,000t of 2011/12 season corn from state reserves.
However, the corn stockpile was estimated to be as high as 230mt before this month’s sell down began.
Apart for clearing old, deteriorating stock, the aim is to find a price that is high enough to keep the local farmers happy and low enough to keep domestic feed mills in business, and to choke off imports.
However, the reserve stocks are also held in the north of the country, in the heart of the main production regions and the majority of the consumptive demand is in the south of China.
The average auction price last week was about 1400 Renminbi (Rmb) and the average cost of freight from northern China to the southern consumers is around 350 Rmb.
This equates to 1750 Rmb CNF south China or US$254 (A$338) cost and freight using last week’s Rmb/USD exchange rate of 6.9.
The latest United States Department of Agriculture (USDA) report has projected China’s corn imports at 3mt and a fall in domestic supply of around 14mt, mainly due to reduced plantings.
On the demand side, feed and residual use is expected to increase based on continued relatively low internal market prices, efforts by the government to promote the use of domestic supplies (reserve stock auctions, government subsidies of more than US$40 per tonnes to stockfeed manufacturers to use domestic corn), and reduced imports of corn substitutes.
This is where it impacts the Australian producer.
Two of the primary corn substitutes are feed barley and sorghum. Australian sorghum has simply been uncompetitive into the Chinese feed ration this season, with prices elevated well above US origin sorghum due to a 50 per cent reduction in production.
However, US sorghum prices have also been quite resilient compared to global feed barley values.
This has meant that Chinese imports of feed barley have increased to record levels this year at the expense of sorghum and despite the plentiful supplies of corn.
But this hasn’t come without a cost as the world price of feed barley has done plenty of work to the downside to buy this Chinese demand.
