Analysis: More to China corn stocks scenario than meets the eye
Now that the dust has settled from USDA's hefty November adjustment to Chinese corn balance sheets, we can look further into why this may have happened. A close examination of the Chinese corn numbers reveals that the world might have less corn t...
Now that the dust has settled from USDA's hefty November adjustment to Chinese corn balance sheets, we can look further into why this may have happened. A close examination of the Chinese corn numbers reveals that the world might have less corn than it thinks.
In its November report, the U.S. Department of Agriculture (USDA) raised 2015/16 China corn ending stocks a massive 26 percent on the month to 114 million tons, but on average, Chinese analysts are predicting carryout of at least 150 million tons.
Additionally, USDA made large upward revisions to corn ending stocks for the previous two years based almost entirely on a shift to feed and residual, reflecting the assumption that Chinese livestock farmers used less corn for feed over the past two years than had been expected.
Despite producing nearly one-quarter of the world's corn, China exports virtually none of it. ( http://tmsnrt.rs/1QyXxse ) Aside from negligible corn imports, China is a massive net importer of other grain and oilseed crops, including feed grain to assist the world's largest pork industry.
Thus, any change to China's balance sheets, particularly with demand, has a global ripple effect on alternative feed crops. USDA's move left many confused as to why it made the change now, and why its view differs from projections of other industry analysts.
There may be some possible explanations for this, but despite the huge disparity over Chinese corn stocks, what may be more important is that the apparent global corn supply glut in reality may not be a glut at all.
CHINA CORN MARKET LOW-DOWN
In 2008, the Chinese government introduced a price support program for corn to encourage farmers to grow more of it. Since then, Chinese corn production has swelled by more than one-third.
China has the tendency to sit on a large stockpile of corn in its effort to be self-sufficient and rely less on imports, all while protecting against any potential risks to food supply.
A surge in world corn supply over the past couple of years has caused global cash prices to fall, while government-supported Chinese prices remain high, roughly twice as expensive as U.S. corn.
This has made importing alternative feed grains into China more cost-effective. Imports of barley, sorghum, and distiller's dried grains with solubles (DDGS) shot up in late 2013 and have stood at historic levels ever since.
Cheaper alternatives have steered livestock farmers away from the pricy corn, causing the Chinese government to have to purchase large amounts of domestic corn in order to continue the price support program.
On Sept. 18, Beijing responded to the oversupply by lowering the support price by 10 percent. Even with the decrease, China's corn prices remain well above the rest of the world.
Controversy over China's corn carryout is rooted in the fact that there are no official government statistics on China stocks. This has led to a wide range of industry estimates, with USDA having been labeled "too low" by many analysts.
Without official baselines for several elements of the demand picture, estimates are relative to themselves, making it impossible for anyone to be "wrong." But there are some factors that may explain the logic behind USDA's lower position.
Most Chinese analysts are predicting corn carryout based on how much corn the government claims to have purchased and sold. However, crooked practices have been reported by the Chinese media, including multiple purchases recorded for the same order, making it rather likely that China's government has overstated these transactions.
Currently, there are several public reports stating that much of the stored corn has turned moldy and will thus never enter the market. USDA has more than likely accounted for some of this loss in its estimate but it is unclear whether other analysts have done the same.
USDA predicts a 6 percent pickup in hog production next year, which can partially explain its higher feed use numbers. Particularly, the higher estimate on corn for feed is balanced by USDA's expected decrease in barley, sorghum, and DDGS imports.
But none of this explains why USDA suddenly changed historical data this month, especially while alternative feed imports have been booming for some time now.
One potential explanation for this is Beijing's lowering of the corn support price in September. Since the support price has never been lowered since its introduction, USDA could have interpreted this as the "official" recognition by the Chinese government that China is probably sitting on more corn than it had thought.
USDA also had extra incentive to make sure estimates were sound in its November report because the report is the baseline for the agency's annual long-term projections that are expected in February. So if any major revision were to come, November was a pretty reasonable time to expect it.
The discrepancy over current Chinese corn stocks is perhaps less interesting than the actual implication this number has on the global balance sheet.
According to USDA, 2015/16 world corn production is expected to fall from last year's record levels, though both domestic consumption and ending stocks are expected to increase.
But if we simply subtract China based on its nonparticipation in world corn trade, 2015/16 ending stocks fall at the same rate as production, but with no decrease to consumption. ( http://tmsnrt.rs/1QyXNaK )
This means that globally, instead of a 2 percent year-on-year increase in corn carryout, the reality instead is a 10 percent drop. Perhaps this is a more accurate view of the world corn supply as it stands.
Ever since China left the corn export market in 2007, the share of world corn stocks accounted for by other countries has been decreasing, even amid massive production in North and South America since 2013. In 2015/16, the rest of the world's share is expected to drop to the lowest levels since 2001/02, below 50 percent. ( http://tmsnrt.rs/1HddCRy )
The point is simple: we have less corn than we think. And as Chinese corn stocks push higher, the share of corn carryout by the rest of the world gets smaller and the global corn picture becomes even more distorted.