US corn supply is predicted to plunge by 23 percent over the next year, but the tighter domestic market may be a short-lived phenomenon pending the resolution of the US-China trade war. The world's two largest economies have been embroiled in a trade battle in which Beijing hit US soyabeans with a 25 percent tariff, crippling Chicago soyabean futures and spurring last week's $12 billion farmer aid package from the US government.
In recent years, US farmers have increasingly planted soyabeans at the expense of competitor crops such as corn in response to China's booming appetite for beans. Last year, soyabeans accounted for about half the value of US agricultural exports to China, which uses the protein-rich oilseed to feed its massive hog herd.
Even if the trade war is resolved now and both sides removed tariffs against one another immediately, there is no guarantee the soyabean market would instantly snap back to its former self with steadily expanding US exports, largely driven by China.
But if the conflict drags on, US farmers will be much less inclined to plant soyabeans next year and may favour other crops like corn, wheat or cotton, which could lead to a huge surplus of supply beginning in late 2019, and ultimately to depressed prices all around.
Chicago soyabean futures surged 3 percent on Tuesday over the potential revival of US-China trade talks, but government officials declined to verify the news media report. This gave market-watchers hope that US soyabean trade to China could soon reopen, but last week's announcement of the US farm bailout, which includes direct payments to farmers, implied that Washington anticipated the tariff battle to press on a little longer.
The payments are meant to be a one-time deal because US farmers would not have known of the global trade disruption to come when they planted their 2018 crops. But they will adapt their 2019 plans based on market conditions, according to US Agriculture Secretary Sonny Perdue.
"I think we'll see more corn planted next year rather than soyabeans. But that's not for me to determine," Perdue told Reuters on Saturday. "We want people to plant according to market signals rather than government programs."
The signal is crystal clear. After assessing the likely tariff impacts, the US Department of Agriculture estimates total US soyabean use will decline fractionally on the year based on fewer exports, pushing ending stocks to a record-high 580 million bushels.
That is not an environment supportive of planting nearly 90 million acres of soyabeans, especially when considering the robust corn demand and declining supplies. China has already vowed to curb soyabean consumption and look for other alternatives in feed rations such as corn, wheat and rapeseed. Whether or not this plan is feasible and/or likely is yet to be determined, but if so, it would not bode well for US soyabeans to try to win back Chinese business.
Perdue is not wrong in his statement about more corn acres, but prior to the two governments escalating the trade row earlier this year, market signals were suggestive of strong global soyabean demand and that the oilseed would continue to be an attractive choice for farmers.
The soyabean-to-corn futures price ratio is one of the key indicators of which crop US farmers are likely to favour, and although it is still early to draw conclusions, that ratio is siding with corn. The ratio of November soyabeans to December corn for 2018 expiration was at 2.38 after Tuesday's close, and this is the lowest value for the date since 2012.
But the 2019 contracts will be the benchmarks for next spring's planting, and that ratio finished at 2.31 on Tuesday, neck-and-neck with 2015 for the lowest since 2012. Values near 2.5 and higher tend to favor soyabean plantings in the spring.
A lot can change in the next several months, but it is important to consider now how futures prices might look come spring if the market starts running with the idea that US farmers will significantly expand corn acres in 2019 at the expense of soyabeans.
US soyabean plantings have not dropped year-over-year by more than 1 percent since 2011. A 1 percent decline from 2018 levels would yield 88.7 million acres. But extra corn acres, especially given the huge yields of recent years, would quickly add to stockpiles. For example, if the United States harvests 3 million more corn acres next year on a conservative trend-line yield of 175 bushels per acre, that would produce an extra 525 million bushels.
On the other hand, an increased focus on soyabeans in South America might be a positive factor for US corn demand. If China is a captive buyer of soyabeans out of Argentina and Brazil, US corn exporters may be able to grab a bigger global market share next year if South American producers place less emphasis on corn production.
Corn is not the only alternative to soyabeans for US farmers, either. Global wheat supplies are set to shrink following dismal harvests in many key producing countries, and with US wheat acres near 100-year lows, there may be some room for expansion in 2019.
Cotton futures spent most of July at the highest levels for the month in seven years, and global supplies are also seen hitting a seven-year low in 2019. Poor crop conditions in top grower Texas may also lead to a tightening in domestic production.
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