2021 Grains Outlook - Part II Fundamentals
Teucrium | December 23, 2020
2021 Grains Outlook
The Big Shift - Part II
Fundamentals: Supporting Prices (for now)
Commodity markets are primarily driven by supply and demand. Grain market supply and demand is estimated and reported monthly by the USDA in their World Agricultural Supply and Demand Estimate report (WASDE). The supply and demand data as presented is referred to as the “balance sheet.” A balance sheet is said to be “tightening” when supplies are declining relative to demand, and “expanding” when supplies are increasing relative to demand.
In general, US and global corn, wheat, and soybean balance sheets have been tightening the last few years. As part of that, the USDA is estimating all three grains will have record high demand for the current production year. In the past, we have learned that as the world builds a larger demand base, it is difficult to deviate from this demand going forward, even in years when there are production shortfalls.
Importantly, the prices of corn, wheat, and soybeans are highly correlated. This is due in large part to the common and sometimes interchangeable uses for grains. For example, the number one global use of corn and soybeans is to feed animals. Wheat is also used as animal feed, though to a much smaller extent. Corn, soybeans, and wheat can all also be used to create biofuels. Given their interchangeability, a meaningful price move in one of the grains can “pull” the prices of the other two in the same direction. Perhaps this is one reason why we continue to see relatively high wheat prices despite the expanding global balance sheet.
Chart 5
This is for illustrative purposes only and not indicative of any investment. Past performance is no guarantee of future results.
Chart: DC Analysis, LLC, using data from USDA through Sep. 30, 2020. Used with permission from DC Analysis. https://apps.fas.usda.gov/psdonline/app/index.html#/app/home
The information and data contained herein do not constitute investment advice offered by Teucrium Trading, LLC and are provided solely for informational purposes.
Fundamentally, the move in grain prices this year appears to be justified. Current US Stocks/Use[1] ratios for corn and soybeans are as low as they have been in the last five years or more.
SOYBEANS
The US soybean balance sheet is currently tighter than corn and the Stocks/Use ratio is the lowest it’s been since the 2013–14 crop year. Globally, the soybean Stocks/Use ratio is as low as it has been since the 2015–16 crop year. See Chart 6.
Chart 6
Chart created by Teucrium using Bloomberg Finance LP on 12/22/2020
Front Month Soybean Futures vs Global Stocks/Use Ratio
Monthly Price Chart 09/01/2009–11/30/2020
Past performance is not indicative of future results
U.S. soybean supplies have dwindled as Chinese soybean imports have soared over the last two years. In the 2018–19 crop year, the Chinese imported a total of 82.54 million metric tons (MMT) of soybeans, equivalent to approximately 3 billion bushels. The 2020–21 crop year estimates show China importing 100 MMT, or nearly 3.7 billion bushels. That jump, if realized, would represent a 23% increase in just two years. The growth in Chinese soybean demand appears to be tied to the rebuilding of their hog herd and the stockpiling of strategic reserves.[2] What’s more, the Chinese are relying heavily on US soybean exports, reflected by the historic amount of U.S. soybean sales commitments already made this crop year (see Chart 7).
Chart 7
This is for illustrative purposes only and not indicative of any investment. Past performance is no guarantee of future results. Chart: DC Analysis, LLC, using data from USDA through December 17, 2020. Used with permission from DC Analysis. The information and data contained herein do not constitute investment advice offered by Teucrium Trading, LLC and are provided solely for informational purposes
Currently, attention is on the South American soybean crop, specifically in Brazil and Argentina as various degrees of drought continue to persist across large portions of those countries. Brazilian and US combined soybean exports represent over 85% of total global soybean exports. Brazil alone accounts for about one-half of global soybean exports, and any significant impact on production will impact the overall balance sheet and place even more importance on the 2021–22 US crop. Brazilian soybean famers typically finish planting in December and harvest through March and April. Despite weather challenges, it is possible that Brazil could produce a record soybean crop even if the USDA reduces their current crop estimate of 133 MMT down to analysts’ estimate of around 130 MMT. Note that Brazilian production of 133 MMT is already reflected in the global balance sheet. Anything less than that would likely be viewed by the trade as supportive for prices.
CORN
Importantly, the Chinese are also poised to import a record amount of US corn. As of December 17, 2020, U.S. corn export sales commitments to China stand at a record 11.55 MMT for the 2020–21 crop year, which began on September 1, 2020. China, until this year, has never imported more than 6 MMT from the world market.
Chart 8
This is for illustrative purposes only and not indicative of any investment. Past performance is no guarantee of future results. Chart: DC Analysis, LLC, using data from USDA through December 17, 2020. Used with permission from DC Analysis. The information and data contained herein do not constitute investment advice offered by Teucrium Trading, LLC and are provided solely for informational purposes
Internal Chinese corn demand appears to be robust, with domestic Chinese corn prices trading near 5-year highs. The Chinese aggressively auctioned off corn inventories this year to both alleviate price inflation and maintain freshness of state reserves. Presumably, China is replenishing their reserves and is taking advantage of pricing arbitrage, buying US corn for around $4 and selling older domestic reserves for as much as double that amount.
Chart 9
Chart created by Teucrium using Bloomberg Finance LP on 12/22/2020
Front Month Dalian Corn Futures vs Front Month Corn Futures
Daily Price Chart 12/31/2019–12/18/2020
Past performance is not indicative of future results
Robust global demand and tighter balance sheets have helped push corn prices to their current levels, testing the 5-year highs. However, to confirm the Big Shift we will likely need to see continued tightening of the global corn balance sheet through the 2021–22 crop year.
Weather challenges might be the catalyst that limits produciton and contributes to futher balance sheet tightening in 2021.
We will discuss in Part III of the 2021 Outlook.
Stay tuned....
[1] The Stocks/Use Ratio compares Ending Stocks (beginning stocks + production – total usage) to Total Usage. A higher number indicates a larger supply relative to demand while a lower number indicates a smaller supply relative to demand.
[2] African Swine Flu decimated the Chinese hog herd between 2018 and the end of 2019. It is estimated that 30–50% of the Chinese hog herd was lost in this time frame.