U.S. corn supply is predicted to plunge by 23 per cent over the next year, but the tighter domestic market may be a short-lived phenomenon pending the resolution of the U.S.-China trade war.
The world’s two largest economies have been embroiled in a trade battle in which Beijing hit U.S. soybeans with a 25 per cent tariff, crippling Chicago soybean futures and spurring last week’s US$12-billion farmer aid package from the U.S. government.
In recent years, U.S. farmers have increasingly planted soybeans at the expense of competitor crops such as corn in response to China’s booming appetite for beans. Last year, soybeans accounted for about half the value of U.S. agricultural exports to China, which uses the protein-rich oilseed to feed its massive hog herd.
Even if the trade war is resolved now and both sides removed tariffs against one another immediately, there is no guarantee the soybean market would instantly snap back to its former self with steadily expanding U.S. exports, largely driven by China.
But if the conflict drags on, U.S. farmers will be much less inclined to plant soybeans next year and may favour other crops like corn, wheat or cotton, which could lead to a huge surplus of supply beginning in late 2019, and ultimately to depressed prices all around.
A recent soybean futures surge, based on unconfirmed reports of a trade talk revival, gave market watchers hope that U.S. soybean trade to China could soon reopen, but last week’s announcement of the U.S. farm bailout, which includes direct payments to farmers, implied that Washington anticipated the tariff battle to press on a little longer.
The payments are meant to be a one-time deal because U.S. farmers would not have known of the global trade disruption to come when they planted their 2018 crops. But they will adapt their 2019 plans based on market conditions, according to U.S. Agriculture Secretary Sonny Perdue.
“I think we’ll see more corn planted next year rather than soybeans. But that’s not for me to determine,” Perdue told Reuters. “We want people to plant according to market signals rather than government programs.”
The signal is crystal clear. After assessing the likely tariff impacts, the U.S. Department of Agriculture estimates total U.S. soybean use will decline fractionally on the year based on fewer exports, pushing ending stocks to a record-high 580 million bushels.
That is not an environment supportive of planting nearly 90 million acres of soybeans, especially when considering the robust corn demand and declining supplies.
China has already vowed to curb soybean consumption and look for other alternatives in feed rations such as corn, wheat and rapeseed. Whether or not this plan is feasible and/or likely is yet to be determined, but if so, it would not bode well for U.S. soybeans to try to win back Chinese business.
Perdue is not wrong in his statement about more corn acres, but prior to the two governments escalating the trade row earlier this year, market signals were suggestive of strong global soybean demand and that the oilseed would continue to be an attractive choice for farmers.
The soybean-to-corn futures price ratio is one of the key indicators of which crop U.S. farmers are likely to favour, and although it is still early to draw conclusions, that ratio is siding with corn.
A lot can change in the next several months, but it is important to consider now how futures prices might look come spring if the market starts running with the idea that U.S. farmers will significantly expand corn acres in 2019 at the expense of soybeans.
U.S. soybean plantings have not dropped year over year by more than one per cent since 2011. A one per cent decline from 2018 levels would yield 88.7 million acres.
But extra corn acres, especially given the huge yields of recent years, would quickly add to stockpiles. For example, if the United States harvests three million more corn acres next year on a conservative trend-line yield of 175 bushels per acre, that would produce an extra 525 million bushels.
On the other hand, an increased focus on soybeans in South America might be a positive factor for U.S. corn demand. If China is a captive buyer of soybeans out of Argentina and Brazil, U.S. corn exporters may be able to grab a bigger global market share next year if South American producers place less emphasis on corn production.
Corn is not the only alternative to soybeans for U.S. farmers, either. Global wheat supplies are set to shrink following dismal harvests in many key producing countries, and with U.S. wheat acres near 100-year lows, there may be some room for expansion in 2019.
Cotton futures spent most of July at the highest levels for the month in seven years, and global supplies are also seen hitting a seven-year low in 2019. Poor crop conditions in top grower Texas may also lead to a tightening in domestic production.
Karen Braun is a Reuters market analyst. The views expressed here are her own.