The world market for corn, as well as wheat, today also focuses on the US and has already entered the phase of the so-called “weather” market.
In the US there are very high ratings of crops, despite the decline in crop areas. However, in its report on June 29 USDA can revise them, because one of the world’s largest analytical agencies Informa Global Markets has increased its estimate from 88 million acres to 88.7 million acres at the end of last week.
And this decline will mean additional pressure on prices.
The rating of crops in the US today is the highest – the weather in the corn belt was and remains very good, and the moisture reserves in the soil are large. Unless in some areas locally is still the drought.
Today, American corn has the best ratings since 1994. Everyone expects a very good harvest, but, as calculations show, the correlation between high ratings and high yield is only 23%.
That is far from the fact that a high estimate at the beginning of the vegetation presupposes a high yield – everything will depend on the weather, and the “weather” market in the US for corn continues until the middle of July.
That is, any problems that may arise during this period may negatively affect the future yield and will be immediately integrated by the market and lead to an increase in prices. During this period prices are the most sensitive to weather.
To date, the trend yield – 11 t / ha, which is taken into the USDA account, is lower than last year (11.1 t / ha), but the market does not even take it into account.
It is based on an estimate of 11.25 t / ha, that is + 3%. That is, the yield is expected to be higher than the trend level and even than last year.
Accordingly, the volume of the harvest will be large. If the USDA forecasts 356.6 million tons, and the yield is 3% higher, then the US will receive almost 10 million tons more.
The general supply will decrease in comparison with the current campaign, but it will remain high. That is, the balance in the US will not be strained.
If everything goes well, prices for corn in Chicago, as well as for wheat, in the “weather” market phase, will go down, and vice versa. Therefore, you need to monitor the weather in the US at least until the middle of July.
Carnival, but in the US
In Brazil, the second crop of corn is harvested, safrinha. There are still declining estimates of its production. USDA forecasts 85 million tons, and private analytical agencies – 79-83 million tons.
From July shipments of safrinha to foreign markets will begin, and this will be another additional factor of pressure on prices.
Now is the off-season period, but very soon we will see how the export rates will start to grow, and this will become a “bearish” factor for the corn market.
Prices of Brazilian corn today are at the American level, although usually, Brazil is cheaper. In the Latin American country, there is a strong devaluation of the Brazilian real against the dollar. This renders support to prices. And, for example, the prices of Brazilian soybeans are more competitive than those of the American one.
This shows that the production in Brazil goes not very good, but in the long term, the decline in supplies from Brazil is the positive sign for the United States, their main competitor.
Today, the US sells its corn of both new and old campaigns at a very high rate, and in a report on June 12, USDA increased the export estimate for the current season.
As a result, the final stocks in the USA will decrease in the next campaign. This will become a support factor for the market.
Therefore, the US needs to beware of weather problems that can lower yields below the trend level and lead to a drastic reduction in stocks, an increase in the tension of the balance sheet and, accordingly, this will be a good support for prices.
If the stock/consumption ratio drops to 11.5 and the yield even 3% lower than the trend level if the estimates of exports in the current and next campaign increase, prices can raise more than $ 4 per bushel. Now they are below this level.
Now the reserves of corn in China are dropping very much: according to the USDA estimate – by 19 million tons. This year they began to sell them actively.
Moreover, the Celestial Empire is also affected by drought, and production may be reduced. This will spur the demand for corn in China.
Although it is difficult for analysts to monitor this country because it is very closed in terms of statistics. In addition, local specialists do not take into account many balances.
For example, their reserves, which lead to the large reserves of the world, are fully used by the Chinese in the domestic market.
In general, the global balance of the next season will be tenser compared to the current campaign. For example, the world’s final reserves will fall from 195 million tons to 193 million tons. This is a significant decline, and it indicates that the long-term growth of corn prices remains.
This balance is much more intense even compared to wheat. We forecast the risk of a market decline until October. And only in the second half of the autumn is a price rebound. On Euronext corn goes down under pressure from Chicago.
Price with no risk
In Ukraine, corn exports are declining. Last month about 1 million tons were shipped. This is explained by the end of the season, to which we are approaching. However, we obviously see that this season exports will be significantly lower than in the past, about 2-3 million tons.
As it was predicted, in Ukraine 4.6 million hectares are seed with corn. The USDA expects the future harvest to reach 30 million tons with a yield of 6.52 tons per hectare. In our opinion, these are high estimates, especially given the drought. The situation may worsen, and so far nothing is clear about corn.
We proceed from a yield of 5.9 t / ha, and our production forecast is 27 million tons.
The USDA has greatly overestimated the estimate for Russia – 19 million tons, although the market is oriented at 15 million tons. The US ministry gives too high forecasts for the Black Sea region as a whole.
But if the drought in Ukraine continues, the USDA will probably go on reviewing these indicators.
The basis of Ukrainian corn in relation to the Chicago exchange in this season is excellent. A year earlier, in March-May, it was generally negative, and this year prices started at a fairly high level and now they are higher than world market prices.
The base remains high even though the prices for Ukrainian corn slipped a little: they reached $ 185-186/t on CPT for a new harvest, and now they are below $ 180 / t. That is, they are at the same level as forage wheat. Barley was a little higher, but it also declines because of the start of harvesting.
Nevertheless, this price for corn is high, so we recommend selling 30% of forwards. Because there is a high probability that the market will continue to sink.
In the short-term forecast, if everything goes well in the US, then we will see a further decline in prices. There are no grounds for their growth. Any problems with the weather in America will cause the market to rebound.
In the long run, from mid-July onwards, the market also will not find any serious factors to support.
It is also important to monitor the weather in the Black Sea region, and another point that could affect the market is the USDA report on June 29, in which it can raise corn areas in the US.
And in the July or probably in the August report, when the “weather” market phase passes, the US ministry will adjust its assessment of production.
Viktoria Blazhko, Agritel consultant
Based on: “Panoramas of the agrarian markets” Agritel