Porto Alegre, August 16, 2021 – Expectations of a US crop smaller than initially forecast are beginning to be confirmed with the update on the forecasts carried out by USDA for this month of August. In this first productivity update for the 2021 crop, the higher-than-expected cut brought important movements to the Chicago Board of Trade and created a more tense environment for this new business year that begins on September 1. While these production data will be going through adjustments until January 2022, doubts persist about China’s stance towards new purchases of corn in the United States and, in fact, this must be the main factor either supporting or sharply increasing prices in the coming months.
Evidence of losses in the 2021 US corn and soybeans crop has officially become clearer with this USDA August report. This is the first yield adjustment made for this 2021 crop in accordance with spring and summer weather evidence. As soil moisture levels and rainfall regime did not improve in August in the Plains and center-north of the Midwest, production losses would be just a matter of numbers to be measured and defined. Corn, soybeans, and spring wheat suffered from the drought, and the losses are starting to be assessed.
Wheat copes with a sharp decline in US production, with cuts in ending stocks, along with losses in Canada and Russia. The wheat market begins to behave in a bullish way in the middle of the harvest in both Russia and Ukraine. The price ratio between wheat and corn is a variable that can inhibit corn from registering strong price lows even with the US harvest starting next month.
These are the first data for the US harvest, that is, wheat is a supporting variable. A normal corn crop could bring an even bearish impact on wheat. However, USDA brought a strong initial correction to the corn numbers. The local crop was being estimated at 385 mln tons, the market was expecting an initial cut to 380 mln tons, and USDA pointed to 374.7 mln tons. The expected yield at 179.50 bushels/acre was initially lowered by the market to 177 bushels, and USDA brought it to 174.60 bushels/acre. As this is the first correction, it is necessary to wait for the harvest progress, the real numbers from the fields, and the adjustments that can arise in the next reports. Some analysts still believe in cuts to 173 bushels/acre. As the center-south section of the US Midwest has very good yields, the north section would actually have to a crop with even worse numbers to reduce the national average.
The loss of 10 mln tons foreseen so far changes the supply and demand environment. USDA reduced exports for the current business year due to the slower flow in recent weeks. The stocks of the old crop (2020/21) reached 28.3 mln tons. The fall in production had to be equalized with a certain slowdown in future demand for 2021/22. But exports had the strongest adjustment, with the projection of a decline from 70.5 to 60.9 mln tons in this next business year. This means that if there are new production cuts, it is likely that USDA will lower again its export projection. But exporting less means sharp highs in either premiums or CBOT prices.
The fall in US exports is a number that brings about several discussions. The first one involves the Brazilian crop. USDA is still estimating exports of 23 mln tons by Brazil even with its sharp decline in production. If Brazil exports that volume, it will run out of stocks for 2022. Brazil has not made new corn exports but only shipped previously sold volumes. So, a large part of the global demand will end up entering the US market from September to be supplied, which could support prices on the CBOT in the middle of the harvest. Some price decline during the harvest is always normal and would be sharper in case of a normal season. However, with Brazil out of sales and wheat and corn with losses in the United States, lows may be limited.
So, the projection of a cut in US exports does not match with the decline by 10/15/20 mln tons by Brazil. But there is a point under discussion which becomes the great unknown of 2022, now with greater weight in the formation of prices: China. USDA did not change the data on China, that is, it left imports forecast at 26 mln tons for both the old and new crops. Neither did it raise the projection for Chinese production. China released information pitting its imports for 2022 at only 20 mln tons and its local production above 271 mln tons, while USDA projects 264 mln.
China has released some ‘bearish’ information before the arrival of the US crop, such as the trend for importing fewer soybeans, buying more rice in switch for corn, besides a larger Chinese corn crop. However, its domestic prices do not fall. Only in the northeast of the country, a region that concentrates the largest share of Chinese production, have corn prices have declined a little in recent weeks. In big demand poles, prices are still approaching their highs. The Chinese crop begins to be reaped in late September. If prices do not fall with the arrival of the local crop, there will be a strong sign that purchases of US corn will quickly be resumed from November or even sooner. In the case of soybeans, China slowly resumed purchases last week, and there is no doubt it will buy large volumes during the US harvest.
In short, satisfactory purchases by China this coming business year in a situation of low US stocks could put Chicago back on the rise again, perhaps extrapolating the 2012 record. A slowdown in Chinese purchases could stabilize stocks in the United States, even at low levels, and avoid support for extraordinary highs of corn on the CBOT. It is important to note that the 2012 highs, with Chicago at USD 7.80/bushel, occurred in the sharpest production losses in the history of the US crop and with stocks of only 20 mln tons. Today, the forecasted stocks are 31.5 mln tons. The fall in these stocks, due to excess exports, could indeed make prices skyrocket. Note that in 2020, average stocks were 56 mln tons, with prices at USD 3.50/bushel. Today we are at USD 5.70, and the upward curve could occur with excess exports. Therefore, China becomes a fundamental part of 2022, regardless of the US crop losses and the absence of Brazilian exports.
Agência SAFRAS Latam
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