Global Corn Outlook: US Focus
BMI View: The end of a record US corn harvest underpins our view that prices will remain subdued over the short term. We have also revised our long-term forecasts lower due to improved market supply. Technical indicators support the view of an eventual rebound, as speculative positions remain at lows and the weekly relative strength index is oversold. The key downside risks to prices include reduced Chinese imports due to GMO concerns and a reduced ethanol mandate.
As outlined in our previous US corn focus piece on September 23 2013, we suggested that the strong US harvest would keep prices subdued over the short term. This view has played out, as the US harvest has finished and come in at a record high 355mn tonnes on the back of a record area harvested and strong yields. The total corn area harvested reached 35.3mn hectares, the second largest area in 75 years and the largest since the US began planting soybean, which competes with corn for acreage. Even though we expect a decline in production from major Southern Hemisphere producers Brazil and Argentina in 2013/14, the US harvest has resulted in the global corn market registering a 35mn tonne surplus for the ongoing 2013/14 season, one of the largest surpluses in decades. Consequently, we have downgraded our average corn price forecasts to USc425/bushel for 2014 and 2015, much lower than the USc680/bushel average so far for 2013.
With the 2013/14 harvest complete, we believe there will be three key issues facing the US corn market in Q114. First, the EPA could change its renewable fuels standard (RFS), which directs a certain amount of corn to ethanol production in the US each year. The mandate is widely expected to fall in 2014 (it works on a calendar year as opposed to crop year basis), but there is discussion in the US Congress that the mandate may be abandoned altogether. This could prove significant over the medium term if corn prices begin to rise and ethanol plants lose profitability. Second, the massive combined US grain harvest (which exceeded 500mn tonnes for the first time ever) is putting strain on the country's transport infrastructure, as the crop is also competing with the increased oil production for railcars and track space. River closures for repairs are also contributing to railcar costs rising 200% year-on-year (see 'Transport Network Underinvestment Looming Over Export Prospects', December 6 2013). Third, a key downside risk may come from reduced Chinese demand for US exports, as China has recently halted shipments of US corn due to the previous discovery of genetically modified seeds.
|Close To Support|
|Front-Month CBOT Corn (USc/bushel, weekly) & RSI (below)|