By Alan Brugler
DTN Contributing Analyst
USDA surprised the trade Tuesday by cutting old-crop U.S. corn stocks to 1.701 billion bushels from 1.708 billion in the June report. That is actually 30 million bushels tighter than the 2014-15 ending stocks figure. This had not been expected, as the June 1 corn stocks number released on June 30 had indicated slower corn use than previously expected and a need to reduce feed and residual use estimates. The market was caught leaning the wrong way, but the rationale for the lower ending stocks has price implications going forward.
A close examination of the numbers shows that the WAOB analysts did cut old-crop corn feeding by 50 million bushels from the previous WASDE report. They also cut ethanol use by 25 million bushels on evidence (CAIR report) that sorghum is being used in greater quantities as ethanol feedstock. Ending stocks failed to increase because USDA boosted old-crop corn exports by 75 million bushels from last month, to 1.9 billion bushels.
The reason for the corn export optimism? USDA cut their Brazilian corn production estimate by a huge 7.5 million metric tons, from 77.5 mmt to 70.0 mmt. That is a drop of 295 million bushels from the June estimate, and a drop of 15 mmt (590 million bushels) from last year! That leaves a lot of room for growth in world corn export sales by the other major exporters, and the U.S. is well positioned to earn a big chunk of that business. In addition to the 75 million bushels USDA added in likely exports for June-August 2016, they increased their 2016-17 export forecast by another 100 million bushels. Those "extra" shipments likely would all take place before February.
Why was there such a dramatic cut in Brazilian corn production, and could it happen again? You need to understand that there are two corn crops each year in Brazil: the first, or summer crop, (Verao) and the safrinha winter crop corn (Inverno). In recent years it has been popular to go heavy on first-crop soybeans and then double crop them with safrinha crop corn. Yields are more reliable on the summer corn (our North American winter), which is grown during the wet season in Brazil. While temperatures are mild enough for the winter crop corn, the safrinha corn growing season extends well into the Brazilian dry season.
The situation is somewhat similar to growing summer corn in Nebraska. If you have irrigation, a dry summer doesn't hurt that irrigated corn yield too much, but your dryland yields will be substantially lower. A few timely rains in the early part of the Brazilian dry season can mean record safrinha crop yields, and record overall production such as the 85 mmt grown in 2014-15. But if the rains are missed, as was the case in 2016, yields on dryland fields drop sharply. In this case, there was also some freeze damage in Parana earlier in the season.
The table below shows the corn estimates from the Brazilian government (CONAB) broken down by first and second crop. As you can see, the first crop was down about 4 MMT vs. 2014/15, but the second crop was 11.5 MMT smaller than last year. This was the shortfall USDA picked up with their 7.5 MMT reduction today.
Production (million tonnes)
|July USDA TOTAL||85||70.5||-14.5||-570.84|
To wrap this up, the problems in Brazil have created a sizeable corn export opportunity for the U.S. and to a lesser degree Argentina, Ukraine and other corn exporters. China holds an estimated 53.5% of the world 2015-16 corn ending stocks, but due to acquisition costs, it is unlikely to move out of the country. If the Chinese government is going to ask taxpayers to take a loss on the corn, it will play better that it goes to domestic feed or ethanol use instead of subsidizing foreign buyers.
As of Tuesday morning's report, USDA is expecting Brazilian corn production to rebound to 80 mmt next year, and looks for Argentina to expand from 28 mmt to 34 mmt. These crops would not be harvested before March at the earliest, but do provide an end date to the "extra export" window if the 2016-17 crops develop normally.
There are two reasons to think the crops might not develop normally. The first is our dry season weather pattern discussed above. Brazil might miss the late rains a second time, curtailing yields. The second is the La Nina weather pattern, which is just beginning to develop. Northern Brazil typically sees wet conditions in the Dec-Feb period during a La Nina, which would suggest the first crop corn would be well watered. Drier-than-normal conditions typically develop in southern Brazil during June-August, which would afflict the safrinha corn in that area but not that grown farther north in large-acreage Mato Grosso or Goias.
Alan Brugler may be reached at email@example.com
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