Strong domestic demand should support the price even as policy changes in China could affect world corn trade
Corn prices could be heading back to $5 per bushel due to a disappointing U.S. crop and that bodes well for all grain and oilseed prices, says an analyst.
Water Street Solutions conducted an aerial survey of crops throughout the U.S. Midwest on July 30 taking photos every minute.
The photos show that much of the corn crop in the southern Midwest is in trouble.
“We see a significant pattern of plant population issues in the southern half of the (corn) belt but we also see a crop that is running out of nitrogen,” said senior market analyst Arlan Suderman.
Further deterioration is expected as corn crops use a lot of nitrogen during the grain fill period of development in the middle of August. There were many yellow fields that will become more yellow as weeks go by.
Water Street Solutions is forecasting a national average yield of 160 bushels per acre, which is well below the U.S. Department of Agriculture’s estimate of 166.8 bushels per acre.
A new government estimate is due out on Aug. 12, which is past The Western Producer’s production deadlines.
A Reuters poll of analysts put the corn yield, on average, at 164.5 bu per acre. Water Street’s estimate was among the lowest of analysts polled.
If Water Street’s estimate proves accurate, the short crop will put upward pressure on corn and other grain prices because it would result in ending stocks amounting to a 28-day supply of corn.
“It would suggest marketing year prices much closer to $5 than to the sub-$4 that we’re looking at now,” said Suderman. A higher corn price would also support wheat and soybean prices.
He believes yields could drop as low as 156 bushels per acre if there is significant late-season disease pressure.
Water Street believes anthrac-nose is a real possibility as are stalk rots and leaf blights. Crops are already weakened in many areas of the corn belt and therefore susceptible to disease damage.
Suderman said excess rains in May and June hurt crops in southeast Nebraska, eastern Kansas and portions of Mississippi, Illinois, Indiana and Ohio.
He thinks there are not enough additional bushels in the northwest region of the corn belt to offset the losses in the south.
Suderman believes the short U.S. corn crop will trump a bearish issue that appears to be emerging in China.
The International Grains Council issued a warning in its latest Grain Market Report that there is mounting speculation a major policy shift is imminent in China.
The IGC said it appears China will replace its domestic guaranteed price subsidy program with a more market-oriented policy.
“If introduced, such changes to support policies would likely result in some price realignment and would have far-reaching consequences for supply and demand for corn and other grains,” said the council in its July 30 report.
The U.S. Grains Council provided additional details in its weekly newsletter. It said the statement came from China’s National Development and Reform Commission (NDRC), China’s top economic management agency that reports directly to State Council.
“The announcement of a policy shift by NDRC is a potentially important signal that China may be prepared to rebalance its trade distorting policies on corn,” it said.
The announcement said action could be taken as early as this year.
Suderman said China pays its farmers $9 to $9.50 per bu. for their corn, which is more than two times the U.S. price of $3.50 to $4 per bu.
The handsome subsidy has led to a huge government stockpile of overpriced corn the IGC estimates will amount to 101 million tonnes by the end of 2015-16.
The government has attempted to sell its reserves at weekly auctions but there are no takers be-cause buyers can import cheap corn from the U.S., the Black Sea region and South America as well as alternatives like sorghum and distiller’s grains.
Sky-high corn prices have put pressure on China’s hog producers, who have been liquidating sows.
High feed costs and a shrinking herd are contributing to food price inflation, which is a politically sensitive issue in a country with many poor people.
“They’ve got this problem that they’ve created, so they need to do something about it,” said Suderman.
“They cannot afford to continue to subsidize corn production at the pace that they are.”
There is speculation China will start subsidizing end-user purchases of reserve corn by $2 per bushel while reducing the farmer subsidy by an equivalent amount.
That will drive the Chinese corn price down to $7 per bushel, making it more competitive with imports, especially if the U.S. price rises to $5 per bushel.
Suderman doesn’t expect the proposed policy change to have much impact on U.S. corn prices because exports account for only 13.5 percent of total U.S. corn use.
He is forecasting strong domestic demand from the feed sector with expansion in the cattle and hog industries and growing ethanol demand due to rising mandates.
China is increasingly bypassing U.S. corn in favour of cheaper product from South America and Ukraine. Suderman said the policy shift will likely affect those regions by driving down prices, which result in acreage contraction next year.
U.S. corn prices have a direct influence on many Canadian grain and oilseed prices, so the Water Street forecast for a short U.S. crop and minimal impact from the Chinese policy shift is good news for Canadian growers.