Buy or sell: Corn outlooks converge on higher prices ahead

Corn hogged the headlines at key points of 2019, posting huge price rises as fears mounted about the size of the US crop, before collapsing equally spectacularly when it became clear that – whatever the US mustered – South America and Ukraine were more than able to capitalise on any lost production.

The end of the year petered out as record-breaking export programmes from Argentina, Brazil and Ukraine snuffed out patchy demand, to leave corn prices buffeted by the fortunes of wheat and soybeans.

Here are some possible bullish and bearish scenarios for 2020.

BUY

On balance, the number of supportive factors suggest corn prices can only head largely in one direction through 2020 – upwards.

US President Donald Trump enters an election year armed with a phase one trade deal that, so far, lacks details.

Meanwhile, a raft of domestic issues ranging from an angry biofuels sector through to impeachment have ushered in a degree of uncertainty that is likely to rein in the strength of the US dollar.

That will support prices on a dollar basis, but there is a raft of fundamental reasons for the complex to draw support.

Firstly, it’s hard to overstate the significance of Brazil and Argentina’s export achievements in 2019.

South Korea picked up 60% of its January to October 2019 corn imports from Argentina and Brazil – overturning a 2018 figure where the US supplied 85% of the country’s corn imports.

Both countries are facing dry weather, which may yet undercut their production and means a repeat of last year’s spectacular 150 million mt crops that sent a flurry of export records tumbling is unlikely.

Even if production does get close to last year’s levels, Argentina’s new government has increased its export duties in a move that is likely to be reflected in firmer Up River basis.

Alongside that, Brazil’s rising domestic demand and a 2019/20 export programme that has ended in high domestic prices and fears that the country may have over-exported is likely to crimp export volumes in 2020.

Brazil’s domestic picture tees up the second factor – the shift towards poultry use and production in countries still battling African swine fever, and increased usage of chicken in Asia’s heavily pork-based diets.

Vietnam’s pork sector has been hard hit by ASF in 2019, but corn imports have continued to rise and are expected to do so again in 2020, topping 11 million mt as government initiatives encourage greater use of poultry in the nation’s diet – a move that is reflected in other Asian countries, as well as producer nations.

Brazil’s chicken exports increased 2% in 2019, with the country’s protein producers’ association ABPA quoting a 28% increase in China’s marketing of poultry domestically, while South Korea's consumers have also turned to chicken over pork.

Finally, feed wheat production globally has been hit by the warm weather, boosting protein levels and tightening supply in a move that has driven prices higher and marked corn out as an attractive alternative.

SELL

A downside is harder to discern but there are dangers ahead, not least from China’s ambitious and increasingly unlikely attempt to implement E10 – petrol that incorporates a 10% ethanol blend.

In 2019, according to the USDA, China managed to reach a 2.5% blend rate, with the country potentially reaching 3.5% in 2020 as domestic production capacity stands at around 5.2 million mt a year, mostly corn-based.

Without domestic production, the country could turn to imports as part of a phase one trade deal but a 10% blend rate remains elusive and is unlikely to soak up substantial corn volumes in 2020.

Alongside China’s ethanol woes, the US sector continues to face uncertainty with key players in the conventional oil space utilising a waiver scheme that enables them to avoid biofuel blending obligations.

That has laid waste to expected domestic biofuel consumption in the US, with some estimates claiming up to 10% of the mandated demand is being cut out.

With much of US biofuel demand falling because of lower consumption of corn-based ethanol, production has contracted and stagnated over the last two years.

The USDA said it expects 2019/20 corn demand to amount to 136 million mt – unchanged on last year, and down 4.4% from the 142.3 million mt used in 2017/18.

Further erosion of the US Renewable Fuel Standard could prompt more corn to be returned to the domestic market, or to the export market.

This would undercut corn futures, boost ending stocks and displace volumes from other exporters. 

Finally, the resilience of the US farmer means the country is likely to see a disastrous planting experience yield the sixth-biggest corn crop in history.

Even with the prospect of a phase one trade deal supporting soybean planting intentions, the US is still likely to plant a lot of corn in 2020, alongside potentially big crops from Brazil, Argentina, China and Ukraine.