March was important for grains
Now, back to our two lead stories. As we mentioned above, important details were lacking in the NDRC announcement. What they have said is that the Chinese central government will grant subsidies to the provincial governments, and that the provincial governments will be responsible for food security, grain quality, grain procurement and financial subsidies, presumably for both producers and end users.
Even if we set aside the obvious questions about hands in cookie jars, it seems inevitable that this program will be fraught with confusion and inefficiency. The NDRC announcement closely parallels the rapeseed program that was announced a year ago. That resulted in six totally different programs in the six provinces that produce rapeseed. Imagine the USDA sending massive checks to all of the central U.S. states with a note that says, “We’re moving from a support price system to a market price system; use this money to take care of your producers and consumers.”
We believe that the result of this program over the next 12-36 months will be: fewer corn acres planted; fewer feed grains and feed ingredients imported; and increased industrial use of corn. Also, and very importantly, as Chinese corn prices normalize with world prices their compound feed will contain less soybean meal and more corn or corn bi-products.
Also, we must share our strongly held conviction that governments are the world’s worst traders, even when they aren’t attempting to trade. The first example was the USDA spending billions of dollars in 1986-87 on the PIK and PIK & Roll programs. In their effort to rid themselves of the billions of bushels of corn they had purchased via their support price program, they drove nearby futures to $1.42/bushel and some cash markets close to $1/bushel. They finished that program just prior to the start of the 1988 drought, which took prices back over $3.50/bushel.
The second example was the wheat embargo of 2010-11. The Russian crop had been hurt by hot and dry weather in June and July 2010. Vladimir Putin instituted an export ban on August 5th. World prices quickly rallied $100/MT. For the next nine months all of Russia’s competitors sold wheat to Russia’s former customers at excellent prices. In late-spring Russian exporters were finally able to convince their government that they had excess stocks, but prices had fallen below pre-embargo levels and the Russians were selling their wheat near the lows of the year.
Now, with world corn prices less than 10% off of their 6-1/2 year lows, China has decided that this is the time they should divest themselves of 100 MMT of corn, give-or-take. Spot corn prices on the Dalian Commodity Exchange are almost $3/bushel below where they were a year ago. That is a significant write off when you are lugging half of the world’s corn carry out.
Our second lead story is the USDA’s Planting Intentions report. The single biggest surprise of the report in the report was the corn acreage number of 93.6 million acres. Not only is that the third highest corn number since 1944, it is also more than 3.6 million acres above the average of the analysts’ estimates, their biggest miss on record. The full scope of the problem is realized when we tack on the soybean acreage number of 82.2 million.
The combined total of 175.8 million acres is the largest ever for a March plantings report. Plugging the corn acres into the USDA’s balance sheets from their Outlook Conference gives us a 2017 corn carryout of over 2.5 billion bushels. If we try to moderate that number by switching 1.5 million acres to soybeans-a reasonable move given the SX/CZ ratio at 2.5:1-our soybean carryout swells to more than 500 million bushels.
The obvious question is, “Where did all of these acres come from?” The single biggest answer is wheat. Combined winter and spring wheat acres are down more than five million from last year. Unfortunately, despite this drop to the smallest number of U.S. wheat acres since 1970, next year’s wheat carryout is virtually the same as this year’s. The problem for all three of these markets is large inventories and generally good weather in most producing areas.
The function of the market has clearly become one of pricing more acres out of production. Even with markets 50-60% below their 2012 highs, we still see most operations as being well above variable cost. Unfortunately, at the same time, they are still well short of covering total costs. The good news is that some farmers have been able to shave as much as 40 cents/bushel off of last year’s costs via cheaper rents, lower cost seed and lower fertilizer prices. We expect downward price pressure to continue on both land and inputs.
Looking ahead we see the markets focusing on U.S. planting weather and awaiting more clarity on the corn program in China. We expect more on the former than on the latter. That lack of clarity may chase some Chinese farmers away from corn, which would suit their government just fine.