USDA’s May report begins market trajectory for corn in 2022


     Porto Alegre, May 11, 2021 – Another week of new highs on the Chicago Board of Trade (CBOT). It cannot be said that the picture is still of a worrying climate that will affect the size of the US crop in 2021. However, despite the excellent planting progress, last week’s low temperatures and little rain in the north and west of the Midwest raise some concern to the international and local markets for the crop development. This does not impede the progress of planting, which must again have good progress this week. However, due to the drier spring in such locations, there is attention to the development in June and July. Another point of attention is the USDA’s report on Wednesday, the first with signs for 2021/22. China’s return from the holiday with new corn purchases reflects that it definitely has no stocks to fully meet its demand until the entry of the local crop in October.

     This is definitely a tense year for commodities in the international environment. The focus on the resumption of the global economy, social liberation, and the impetus for the resumption of consumption are important indicators for markets to observe and believe that future demand may really bring unpredictable situations about the stocks available worldwide. Moreover, there is a situation of global liquidity, which makes investors, companies, and growers leverage their positions in stock exchange operations. Commodities were once again the star of the financial market, as was the case with the high liquidity of the world economy registered in the period before the economic crisis of 2008.

     The movement of interest rates and the dollar has been important for this capital movement among the various assets traded around the world. Liquidity is circulating and, currently with a low dollar, assets end up gaining space for strong volatility. As the pandemic in 2020 brought aggressive low volatility, now the resurgence of economies may bring high volatility.

     In agricultural commodities, this movement has occurred since November. Since the end of 2020, there has been a clear movement of financial transition into commodities exchanges. Each market segment found its space for this more or less aggressive volatility according to its fundamental framework. Soybean prices surged in the face of extremely low stocks resulting from the loss of the US production in 2020. Corn also registered production losses in 2020. However, there is an additional and new factor in this environment: China’s buying interest in corn. Previously only an occasional buyer, China has become the world’s largest importer in just a few months, reaching 28 million tons.

     This unpredictable demand from this large global buyer has brought important changes in the fundamental context. US corn stocks dropped to 34 million tons, with a record export projection of 68 million tons. These are not low stocks to the point of causing the ongoing aggressive highs on the CBOT. However, the movement generated by China left the world market with a great doubt about the future global supply. After reducing corn stocks in the United States, China announced it will use more wheat and rice in feedstuff composition. Naturally, these markets were also affected amid the big suppliers such as Ukraine and Russia.

     One situation is more than obvious: China does not have good stocks of corn, and it is necessary, for global food security, that there is a concrete view of the real Chinese stocks. It is no longer possible for USDA to inform the world market that China has stocks of 200 million tons, regardless of any established criteria. Not knowing how much corn China will need increases the global supply risk.

     At this point, we get to May and the USDA’s report that will offer the first signal for the US supply and demand in the 21/22 cycle. Well, as we have already commented, USDA will update the figures on the current business year, 20/21, this Wednesday and may need to raise the projection for local exports and increase Chinese imports to 28/30 million tons. Current stocks of 34 million tons in the United States may decline to 30/31 million tons, as it seems there is no room for cuts in the US domestic demand to offset the increase in exports.

     Thereafter, USDA will undertake the exercise of projecting the first 21/22 supply and demand framework. Production will be projected as usual from the expected area of ??91.1 million acres and potential productivity. A production estimate for 2021 between 370 and 380 million tons is fully adjusted to this year’s potential. A higher projection would have exaggerated optimism about productivity, while a lower projection could signal a production problem that is not evident at this moment. Domestic demand has little room for downward corrections, although USDA may use high price levels as a possible factor to contain demand, which is not clear at this time.

     The biggest point of discussion, then, is the projection for the US exports in 2022. The consensus is for stocks of 34 million tons in 21/22, that is, practically the same as the current ones. So, the market expects USDA to keep the US exports high for 2022. However, this is what the market expects. Both the attaché in Beijing and the Chinese government point to Chinese imports of 15 to 20 million tons in 2022, that is, below the purchases in 2021. To do that, they are based on an area increase by ??3.3% in China, 42.3 million hectares, for a production above 270 million tons, which would be enough to better serve the Chinese market in 2022. USDA, therefore, could reduce US exports by 5/10 million tons and leave the 2022 US stocks above 40 million tons.

     This could be bearish for the CBOT at first. However, if USDA does not cut this export projection, the prices of the new crop may remain very firm, and the market would have to bet even more on a great climate picture in the United States and China to guarantee global supply until next year. The production losses of the Brazilian corn crop is an additional factor in this environment as it will increase the export demand in the United States, Ukraine, and Argentina.

     CBOT prices broke through the barrier of USD 7.00/bushel for the July contract last week. September, month of the early corn harvest, hit USD 6.50/bushel, with no crop losses. The US planting must register another week of rapid progress. The week’s cold must hold germination but not the planting. The biggest concern of the market is about the west and north of the Midwest. As winter was dry in these locations and spring came with less than normal rainfall, less rain from June on in such locations would be problematic. On the other hand, in the center-south and east of the region, the next two weeks will have above-normal rain, favorable to crops.

     Agência SAFRAS Latam

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