Global Grain Supply & Demand in the Era of Covid-19


Ben Buckner (AgResource, Grain Market Specialist):

Okay. Greetings MidPlains Ag and greetings from AgResourceCompany in Chicago. It's nice to be here again for our second webinar. And in this one we will discuss the USDA's May Supply and Demand report, which, of course, is the first that features the new-crop US and global supply and demand estimates.


And also, this is all occurring in the era of COVID-19. We think that this probably has some long-lasting implications. We're seeing some recovery of the economy in the US and elsewhere, but it's going to be very slow and fragile. And so what does that mean to the ag space moving forward? And then, so this is another bearish outlook, but we want you to be aware of this because it will be important during the summer months as we get into the growing season to sell rallies. And I'm going to spend the next 20 minutes or so telling you why that's the case.


So we get into the major themes, they are still the lack of miles being driven and a near-complete shutdown of restaurants and foodservice industries. So we think that this will improve on the margin somewhat, but a lot of things have just been postponed or canceled, major sporting events, sporting seasons as a whole are uncertain. And so that should, on the margin again, reduce total food demand in 2020 and 2021.


The ethanol industry, as of last week, was still operating at just 60% of capacity. And we're hearing that plants await new-crop harvest perhaps before really returning to normal. There is some return of plants in the Eastern Midwest where margins are turning profitable, but elsewhere they are still negative. The ethanol industry will struggle to grow over the next three months.


The USDA report by itself also confirms again, that widespread adverse weather is needed in the US and elsewhere to attract the funds and money back into the ag space. So once again, to turn bullish, it's up to Mother Nature.

And global financial loads are still forthcoming. Even as we were using more gasoline and driving a little bit more the last four weeks, unemployment is rising here and everywhere. Reports are that there are 122 million people unemployed in India. So this will have global far-reaching and lasting impacts on food demand longer-term.


And because of this, South American currencies are again record low. Major grain importing currencies are also low and so the purchasing power has been significantly impacted.

Acreage will continue to expand in South America and in the Black Sea because of this and the economic weakness that we're seeing now will only exacerbate farmer profitability in emerging markets.


And what will normal activity look like? A lot of people are just simply waiting for the virus to end entirely or for a vaccine to really get life back to normal.

And our job as analysts now is to predict how many people does that encompass. Will we get back to 90% of miles driven in six months or85%? There's going to be some segment of the population that simply waits on the vaccine before getting back to work.


And so we know now because corn stocks are selling globally, soybean stocks are declining. The goal in the next four or five months is to shift acres from corn to soybeans, wheat, barley and oats, and even lesser markets by early 2021.


So, there's still all these broad deflationary trends intact. This shows the broad basket of commodities since May 2018. Clearly, there been a lot of weakness recently. We've consolidated since then, but we're generally as the world is waiting on some spark to resume some kind of up trendline. That probably doesn't happen in the foreseeable future, at least over the next quarter. We think that the commodity index just trades sideways for the next several weeks.


Part of that is because of grain oversupply, energy oversupply. The USDA's May WASDE estimated global major crop stocks at a record high 750 million tons. This is up 38 million tons from the previous year.


Stocks to use is estimated at 33%, second-highest on record, and generally very large. And I think what this graphic shows there's clear definition or division between pre-2012 and post-2012. So even during 2012, global major crop stocks were pretty normal. Stocks to use in the years previous to that 20 to 22% and that was the way the world ag space was.


But since then, we've been tracking new acres in Brazil and Argentina and in Ukraine and Russia. Currencies have only exacerbated that, so they continue to expand. We're left with this major change in supply. We have just too much of everything at the moment.


A lot of this in 2020 will be due to massively higher global corn stocks, but in the future years, we think we'll just shift that around. So we will grow less corn in 2021, but probably more beans and more wheat. And so the total number of tons in terms of global stocks will be unchanged, just the pieces of the pie will be shifted around and that's the concern longer term.


And the same is true in the United States. The major crop stocks in the US are estimated at 120 million tons, stocks to use 22%. All of this is very large and kind of bearish longer term. And again, we show this pre-2012 and post-2012 landscape because we've lost world share, world market share in terms of exports who's just been allowed to build combined stocks nearly every year since.


This has only been disrupted temporarily by adverse weather in 2019. But you can see that if the markets rally because of adverse weather, we only plant more and produce more commodities the following year. And so like in the world, this will change. Corn stocks next year will fall, soybean stocks will grow and we'll only be left with 120 million tons of major crop stocks in 2021. And our bet is that we will unless Mother Nature intervenes.


And so a quick analysis of the updated US corn balance sheet. The USDA, pretty much as expected, placed new-crop corn ending stocks at3.3 billion bushels, put the stocks to use at 22%, both of the highest since the mid-80s.


We think that these numbers were rise further still because the USDA has taken a premeasured approach in lowering ethanol's demand drop. We think that ethanol's demand drop ultimately will be lowered another four to 500 million bushels simply because the pace of weekly ethanol production is just so far off the pace that's needed to meet the USDA's forecast. These numbers will be fluid. Ethanol production does rise in the weeks ahead, but it won't happen fast or as intensely enough to change or to validate the USDA's forecast.


So our higher old-crop stocks spill into new-crop, but we think we'll be left at 3.5 billion bushels in 2020-21, stocks to use approaching 24%. So clearly moving forward, we need less corn or more demand ora weather problem. If it's not a weather problem, the market has to signal the need for lower acres, be a lasting period of depressed prices.


So loosening US corn balance sheet also has spilled into the major export of corn balance sheet, major export, or corn stocks. This includes the Ukraine, South Africa, Brazil, Argentina, and Russia will reach a record of 100 million tons in 2020 with normal weather. So that just means it will be steep competition for exports. Everyone wants that piece of pie in South Asia, East Asia, Southeast Asia, but we have to compete with the Ukraine, now even Russia, to get that demand, so that means that prices will be fairly weak for a long period of time and rallies will be met by competition.


So far, prices rally in the US, Russian corn prices will undercut us and then they'll get the demand and so on. So that's the broad theme of corn over the next six or eight months. There's just too much of it. Exporters will be vying aggressively for market share.


And this is what this looks like historically. So, 17%stocks to use is up sharply from last year and actually is the highest since2004. We think, again, this number grows as the US corn balance sheet loosens, but it tells the same story is that there's too much and we need fewer bushels of corn in exportable positions by 2021.


However, the US soybean balance sheet looks at least less bearish. We think that the old-crop US soybean stocks will rise, not because of biofuel issues, but because of export issues. The pace of exports to China, which has improved in the last couple of weeks, is still way below what it needs to be to validate the USDA's forecast.


So we think exports will ultimately be 15 million bushels below the USDA. This will be added to stocks, will spill into implied new-crop supply and demand, and we'll be left with, not an overabundance of soybeans, but certainly adequate.


However, the soybean balance sheet will be more sensitive to whether as in stocks reflects about seven or eight bushels of yield, and so unlike corn, corn can lose up to five or seven bushels of yield and we're still left with too much. The soybean market can't really afford that, or nearly to that extent. So, if we lose two or three bushels of yield on soybeans, then the balance sheet all of a sudden gets very tight. And so we expect the soybean market, more than corn, to react to summer weather issues over the next 90days.


Major export of soybean balance sheet, combined US, Brazil, and Argentina, also tightens by 4 million tons, even with normal weather and expanded acres. So again, like in the US, South American weather needs to be very good to prevent a somewhat bullish outlook for soybeans into early 2021.


So those two markets look very, very different. This is what export or soy stocks look like historically. You can see that we've contrasted pretty significantly over the last two years. Part of that is weather issues in the US last year, issues in South America the year before that, but it's also due to stable and now rising global demand for oilseeds.


The pace of Chinese soybean imports from all origins, mostly from Brazil, has been pretty incredible over the last two months. And the USDA forecasts China's imports to be 96 million tons in 2020, and so record large and back to pre-trade war levels. Though remember, China in 2018, before the trade war began, was forecast to import 104 million tons, so there still has been net demand destruction based on the trade war, but still, it's important to recognize that China will import a record amount of soybeans in2020. And our contacts in China do kind of validate this. And if that's 2019exports might be one or 2 million tons understated still.


So, China is back in the world soybean market, and that important. And we think China will be very active in securing US soybeans for September to December arrival.


Restaurant traffic is, at the very least, not zero. It's hard to see so I've highlighted with this blue circle, but you can see we're only down 97% to the United States as a whole year over year compared to down100% as of May 3rd. So as select states begin to reopen, we are seeing traffic increased on the margin, but you can also tell that there's a long ways to go.


The issue over the next 30, 60 days is that major population centers like L.A., Chicago, New York, will probably keep some measure of lockdown orders in place into the middle part of summer. So there just a lot of people that eat at a lot of restaurants in those population centers. And that has a pretty big impact on total foodservice demand in theUnited States. So it's good and bad. We are bouncing off the bottom, but it will be very, very slow.


This shows the year over year change in sit down traffic in the States that have reopened. Now keep in mind, this is not really a measure of growth, but just the lack of negativity. So Arizona, for example, instead of being completely shut down is now down only 77% from last year. Places like Nevada are down only 84% from last year. But we are seeing, as these regional economies begin to relax restrictions, people have been responding by going out to eat. So that's important, but we're still not there yet, not the real get up and go that we'd like to see to be outright bullish commodities.


We follow weekly dairy sales and prices. That's some kind of indicator of future restaurant demand. So you can see that as of the early part of May, the volume of cheddar sales was down sharply for resellers. And importantly, the prices are also down. So we've gone from $1.64 for a 40-pound block in mid-April to $1.13 per pound last week. Lower sales, lower prices is a clear definition of weak demand, demand destruction. So we're not quite to the point where markets have that get up and go and the all-clear signal that the economy is ready to reopen as a whole.


But there are certain places in the economy that have ended up doing much better. So this is another indicator we think of marginal weekly changes in economic activity. Weekly motor gasoline consumption has rallied from 5 million barrels per day during the lulls of early April to seven and a half million barrels per day of last week. So we're still not close yet to recent year levels. We're still down about 20%, but the change and the speed of the change is interesting.


So as we've used more gasoline, ethanol stocks have been contracting fairly quickly. So the ethanol industry is still very, very slow to recover. We don't expect a major change in the next two or three weeks, but you can kind of extrapolate at some point, stocks will fall to last year or below last year's levels. And at that point, does the ethanol market need to signal the need for more supply via profitable margins? This will all be very precarious. We'll be monitoring weekly gasoline consumption with incredible interest, but we need to make sure that these economies avoid high re-infection rates, but on the margin, things are looking somewhat positive for the biofuel and energy markets.


So you can see we can extrapolate miles driven more or less. So our early April miles driven was down to four million miles per day. This is much different than it was in all the years previously, but we've cut that difference in about half in the 30 days after it.


Futures basis ethanol margins have crawled back to above breakeven basis spots, but are still negative in deferred positions, but still, this is all very regional. There are places in the Eastern Midwest where even the cash prediction margin is positive, out west, cash production margin is still negative, but we should see incremental changes, boosts in ethanol production moving forward because so far the recovery has been pretty limited.


Despite higher gasoline consumption, declining ethanol stocks, the industry as a whole has not gotten the signal to really turn the spigot back on. So what's interesting about this and why we are so still bearish over the corn supply and demand is last week, we produced 175 million gallons of ethanol. To meet the USDA's forecast by June 1st, this number needs to get to 275 million gallons.


There's still a pretty arduous chore ahead if the USDA's bull crop corn balance sheet is to be validated, and this is shown on a monthly basis here. So we plunged in April, our forecast for May official US ethanol production is slightly higher, but we need to average beginning in June 420million barrels per month to meet the USDA's old-crop corn ethanol demand draw. This is not too far off from levels in recent years and so we just think that this is highly unlikely. We do think June, July, August ethanol production goes up from current levels, but not nearly to the point where we'll use 4.9 billion bushels. We think we'll use 4.5 to 4.6 billion bushels of corn in an old-crop position to produce ethanol.


It's not just miles driven. One big issue too is that Brazilian ethanol plunged, as well. Brazilian ethanol in São Paulo is cheaper than ethanol in the US Gulf. So, we've lost a pretty major market for our ethanol exports.


And it doesn't really show much here, but our total corn used for ethanol is a function of gasoline demand, and so miles driven as well as straight ethanol exports. It's shown a little more clearly here. And so the difference between 2016 exports and 2018 exports works out to about 140 million bushels of corn. And so 2020 exports will be down sharply. And so even if we are to normalize or get close to normal in terms of gasoline consumption, what will the ethanol export number be? We think we need to get back to something like record ethanol exports if ethanol's demand draw is to reach 5.4 or 5.5billion bushels in the next one or two years. So again, just highlights the difficult chore that's ahead for energy and ethanol markets and thus the corn balance sheet moving forward.


We also still have yet to deal with the full ramifications of negative GDP growth in 2020. This slide shows the IMF data and forecast. That black line represents the forecast for 2020 and 2021 made in October. The red line shows the IMF updates made this April, which fully accounted for the spread of COVID-19. So what's interesting about this is in all their wisdom, the IMF thinks that the GDP will perform more poorly than it did worldwide than in the 2009 recession.


So this is significant. So even as restaurants open and people start to drive again, disposable income will be down across the world and so the frequency of vacations, restaurant trips, will be much lower than it was pre-COVID-19. There is sort of this forecast for a surge in economic activity in 2021, assuming COVID-19 is contained or a vaccine is available. And the snapback and return of inflation is fairly common in years of recessions and depressions, but a lot of this hinges upon how we handle and contain the spread of this virus in the very near term.


So we'll all be watching the reinfection rates in those places that have reopened their economies with, there again, incredible interest. We need to make sure that infection rates do not return like they did before. And the fall flu season, fall and winter flu season, we need to make sure that the virus is contained during that period before we have some return of economic growth and inflation next year.


And in the very near term, employment falls 21 million in April. So we'll be dealing with massive unemployment for the foreseeable future in the United States. Again, why that matters to us is it all reflects disposable income, trips to restaurants, types of food eaten. And so we think that this will be something that is not overcome very quickly.


Gasoline consumption will continue to rise, but does plateau at something like 85, 90% of normal and stays there for four to six months? That's the big concern longer term. So we've got demand destruction on one side, lack of economic activity, terrible ethanol margins. We also don't see much in the way of threats to trend yields in the US and across the Northern Hemisphere in 2020 just yet.


Though a lot of these crops are still in the bag, and so it's premature to kill a crop for sure, but even based on planting dates, which don't precisely forecast yield, we can see that there is a very broad relationship. When crops, the US corn crop is 65% planted on May 15th, the odds are very high that yield will be above trend and vice versa. And so we think that on the day of May 15th, we should be 75 to 80% planted. And so we probably are in the quadrant that gives us trend or above trend yields, or at least a high probability of that occurring.


Early-season crop ratings, which have been released for two weeks across the Delta and Southeast, have centered on about 70 to 72% good to excellent. And that includes Louisiana, Mississippi, and Arkansas, and they've weathered excessive rainfall pretty well. So we think that foreshadows pretty high national corn good to excellent ratings, which should be released the day after Memorial Day.


We also wonder if oat ratings, which were officially published last week, also foreshadow some kind of really high initial corn rating. So on a nationwide basis, the oat crop was rated at 69% good to excellent versus 58% the year before. Oats in Iowa are rated 79% good to excellent versus 66% the year before. And so the oat belt does sort of overlap a lot of the Northern Corn Belt, so we figured growing conditions are more or less the same. And so again, we're expecting the season's first corn crop rating to be between 70 and 75% good to excellent and that's a bit above average.


And though we don't have much confidence in weather forecast beyond 10 days, it's equally hard to define a model or a map that shows some kind of glaring threat, at least in the near term. This is NOAA'sCFS model's forecast of temperature and precipitation anomalies for the month of June. These will be changing on a daily basis, but the probability of heat and dryness is much lower than normal.


So what that means is to turn bullish agriculture or crops, we need supply dislocation, but now we think that probably falls solely upon pollination and blooming periods. And so really if Mother Nature is to give us a rally that probably doesn't occur until the second half of summer and planting dates, too, probably suggest that a lot of the corn crop will pollinate in the first half of July, which on the margin is a little cooler than the second half of July on average.


We are watching EU and Black Sea dryness as it pertains to wheat yields, but wheat and corn are grown in very different places in Europe and the Black Sea. So the red circles on this slide highlight major corn producing areas of Europe and the Black Sea and that includes Southwest France, Romania, and the northern half of Ukraine. Dryness in Romania, we do see that, but otherwise, Southwest France, Ukraine, which will be a sizable exporter in2020, have seen well above normal rainfall in the last 30 days.


Crops there have also been planted, like in the US, faster than average and we think, as of this weekend, crops really across the European continent should be about 75% seeded, which is about 10 points better than normal.


While the US corn balance sheet is really responsible for the swelling of global supply, it is not entirely responsible. So we are seeing stocks building in other places, including Argentina, Russia, and Ukraine. And when we exclude the US from the major exporter corn balance sheet, we're still seeing production at a record high 224 million tons and that's up 7 million tons from last year.


So combined production in Russia and Ukraine, Brazil, Argentina, and South Africa will be a record level. And again, this just underscores that demand, export demand, will be fought over in a way that we haven't seen for a long time. This will pressure basis at the Gulf, basis in Argentina, anytime the Gulf corn rallies too much, Ukraine will be there to undercut us. There's just going to be a real steep fight for demand and demand is growing just at a normal of 2% per year. And so that's what's going to keep us in the steady to lower price trend throughout the next six months. MotherNature has to be the one to change this around.


And longer term, we still have lost the mechanism that corrects oversupply. So usually we have oversupply, prices fall, production falls. But because current season South America are so weak, and their markets still are based on Chicago Board of Trade prices, growing corn and soybeans inBrazil, Argentina is still highly profitable. Input costs are going up, and that might eat into margins a little bit, but in talking to CONAB, the USDA's equivalent in Brazil, they still expect major acreage expansion through the next two years. In fact, I think farmers in Brazil have already sold half of their projected soybean crop they'll be able to plant this October. It's just very, very attractive to be a farmer in South America.


And so while those currencies are not stimulating production, wheat currencies in major importing countries are on the margin lowering those countries' purchasing power. And so we think there might be financing difficulties in the next six or eight months.


These are major wheat importing currencies, but Turkey and Algeria are also major buyers of corn. So we can see that Algeria's currency is down 15% from last May and that's mostly because of crude oil prices. So a lot of these importing countries in North Africa and the Mid-East do their annual budget based on $40-$50 crude oil, but today crude oil's at $30 a barrel, so you would think that they'll be less willing to chase rallies and overall demand for wheat and corn might be down slightly in 2020.


So all of this reflects financial weakness, global unemployment, just sort of the catastrophe that's happened based on the spread of COVID-19. And as an example, this just shows you what currencies do to prices in different countries. So the price of corn at the Chicago Board of trade is down 25% from last May. That is not insightful. But, when pricing theBoard of Trade corn in pesos and Brazilian reals, those prices are up 15% from last year. So despite four year low prices of corn in the US, there's still profitability to be had in South American. So they're going to keep expanding and adding to this already oversupplied market place.


So finally, we look at what has to happen. So we will assume the USDA's balance sheet and not our balance sheet, but in order for supply and demand to be a better balance longer term, we think that we need to lose some 12 or 14 million acres of corn in 2021. And this will be taken care of through spreads, wheat and soybeans premium to corn, which will widen over time. But only once we cut acres by 12 or 14 million, can we talk about the return of $3.80 to $4 corn again, maybe $4.40 if there are weather issues. But none of that is on the table until 2021, at the earliest.


And so again, how do we cut acres so much? Corn has to be and stay very weak relative to other commodities. Flat price has to be weak. We have to stop incentivizing corn production, and that happens through low prices. And so I know this is all very much doom and gloom, but we want the producers in the US to recognize this and come up with a strategy. Selling rallies, even these Chinese demand-based rallies, which last a couple of weeks within five or seven cents, even those are an opportunity to catch up on hedges, maybe add to sales.


I think the market will struggle above 3.40 basis December corn. 3.80 '20-21 corn is probably a place to start hedging '20-21 crops. So it's just important to be proactive in managing this because we do think that supplies continue to grow as future USDA reports are released. And we do look for net weakness in corn prices and probably wheat, soybeans, between now and late August, early September.


And so I thank you for your time and thanks for having meMidPlains. And if you have any questions at any point in the future, please reach out to us. And also, if you need help marketing your grain, we're here to help and discuss strategy. So please don't hesitate to get in touch with us if you have questions about anything. Thank you very much.

Rich (Midplains Ag):

Yeah. So Ben, I've got a few questions to follow up on here.

Ben Buckner (AgResource, Grain Market Specialist):

Yeah, go ahead, Rich.

Rich (Midplains Ag):

Okay. Could you comment on basis levels across the CornBelt? I know here after the ethanol industry shut down, we went from 500 to 40under. How is that across the Corn Belt?

Ben Buckner (AgResource, Grain Market Specialist):

It's been really impacted and ethanol has had a big part of this, but it's really been the separation east to west, and that's not news, but we still look at basis in Indiana, Ohio, and Kentucky, 10 to 25 cents over and based on regional supply and demand tightness. So imagine we don't reach equilibrium, but there's probably not a lot of downside risk in Western Plainscorn basis. And there probably is 30 to 40 cents of downside risk in the Eastern Corn Belt. And even looking at new-crop offers in the East, they're pretty commonly 20 to 30 cents below December futures. So that all corrects itself pretty quick, because you know that the regional supply and demand, if you were to group Indiana, Ohio, and Kentucky together, for example, it was pretty tight this year, but it will be very, very loose in 2020, unless there just a major, major yield loss. So, I wouldn't be anxious to sell basis on west, but can you get it up 10, 20 cents, probably a spot to get it done.

Rich (Midplains Ag):

Yeah. Most of the farmers out here probably signed up forPLC this year. That's based on the national cash price for the year. Where do you anticipate cash price for the '19 crop to be for?

Ben Buckner (AgResource, Grain Market Specialist):

So we see it probably falling to something like 3.30 or3.35, let's call it 3.30 to 3.40. Well, one of the issues is how that calculated. So it's weighed by each sale. We'd say probably 70% of the US corn crop is sold between September and December. And so it doesn't fall all that much, or it won't really reflect today's cash price. It's just because there was strong basis in the east and just a lot of that calculation has already been done. So, the weight of current cash prices is much less than was the impact of cash prices in October across the US but it does get weaker, no doubt.

Rich (Midplains Ag):

What about the prices over the next, say between now and September?How do you see them going and where do you see the fall lows coming in at?

Ben Buckner (AgResource, Grain Market Specialist):

So again, we're looking for net weakness, of course, but the way we think this all happens, so it's we get the corn planted in the next probably 10, 12 days. We'll have early-season crop ratings that are better than average, that could be much better than average. And that point, we probably do find some kind of intermediate level maybe that's 3.20, 3.15 December Chicago, and then we just wait and see. We need to better understand the US climate forecast. Crops were rated very highly in 2012, as well, so anything is possible.

But assuming normal weather, we'll probably stay neutral through the summer, and then, like the last four years, just the weights of those final old-crop sales in late August, early September will give us our ultimate low, which probably will be a decade low.

And I know we model it out to something like 8.20 in November beans and 2.80 to 2.90 December corn and then it's just kind of tough to be bearish. I think we just probably trade sideways thereafter for a long time and look at South American weather. But it will be tough to be bearish, you know, sub-$3 December corn.

Rich (Midplains Ag):

You mentioned a late '20 low for soybeans this fall, where would you hedge soybeans out between now and then?

Ben Buckner (AgResource, Grain Market Specialist):

I think we'll have opportunities. Now again, I mentioned that the soybean market will be much more sensitive to growing conditions. And so we think there is potential to see 8.60, 8.75 November beans. I just don't know if we can get much above that unless there's a South American weather problem, and that won't happen until January. So anything above 8.70 will be pretty active and adding to or catching up on.

Rich (Midplains Ag):

Okay. If anybody has any further questions, you can email. We have an email address on the screen or get a hold of us at MidPlains Ag. We will be posting this video on our website here as soon as possible. So again, I'd like to thank Ben and we hope you find these recordings useful. If you've got any comments on how we handle this, please let us know. Again, thanks, Ben.

Ben Buckner (AgResource, Grain Market Specialist):

Thanks, Rich. Everyone have a nice day.

Rich (Midplains Ag):

Yeah. Thank you.


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