Commodity market overview: February 2018

Despite its significant role in the dairy industry, corn - as the most widely produced type of cereal - is predominantly used for cattle feeding purposes. Produced almost throughout the whole globe, corn has a higher drought tolerance and is generally more sensitive to excess rainfall.

Up until the 1940s, corn production yield only averaged about 1.6 tons per hectare, rising rapidly thereafter with the introduction of better fertilizer and production techniques. Currently, corn yield stands at approximately 10 tons per hectare – one of the highest values in the cereal complex.

World production of corn accounts for more than 1 billion tons annually. As the largest producers, United States and China account for about 36 and 21 percent of total global production, respectively. As the world’s largest exporter, U.S. exports about 50 million tons of corn every year. Other notable exporting countries include Brazil, Argentine and Ukraine. Collectively, these 4 producers are responsible for about 90 percent of total corn exports.

In parallel with the long-term growth of the dairy market, global corn consumption has been on the rise for years, with last year’s figures exceeding 1 billion tons for the 1st time. China remains the world’s largest consumer, mainly due to rising population and high beef cattle production levels.

At 1,076 billion tons, previous season year’s (2016/17) production was just above the consumption level of 1,061 billion tons, with ending global stocks rising by 6.88 percent to 229.76 million tons.

At the beginning of 2018, rising drought pressure in Argentine led to significant downward revisions for domestic corn and soybean crops. As a consequence, USDA’s Argentine corn production forecast was revised lower to 39 million tons in February – a notable decrease from the January’s forecast of 42 million tons. Since the decrease in Argentine’s soybean exports is forecast to be offset by an increase in U.S. volumes, it is currently projected that domestic farmers will substitute corn with soybeans, decreasing their 2018/19 corn acreage to 89.9 million acres – a 0.55 percent decrease. In the meantime, a 4.3 percent production decline is expected in Ukraine, with this season-year’s production currently forecast at 370.96 million tons.

With consumption forecast to continue increasing and reach 1.068 billion tons in the 2017/18 season year, global corn production is currently forecast to decline 3.2 percent to 1.042 billion tons, resulting in a notable ending stocks build-up. Projected to experience an 11.6 percent year-on-year decline, global ending stocks are currently seen at 203 million tons.

A number of agricultural commodities is currently trading at or near multi-year lows and might appear somewhat undervalued both on historical price basis and in relation to other asset classes. Although the overproduction issue stays relevant for the majority of the agriculture commodity complex, changes in global inflationary outlook might serve as a potential catalyst in the future. As a more fundamentally positive example in the grains market, corn might demonstrate higher investment potential should the commodity asset class experience an upturn in the coming years.  

In February, global wheat production forecasts for the 2017/18 season year were revised to record 758.25 million tons, mainly due to upward crop revisions for Argentine and Ukraine. Consumption estimates have been revised higher as well and are currently seen at 744.79 million tons – a 0.73 percent year-on-year increase. Whereas global ending stocks are currently projected at 266.1 million tons, implying a 5.3 percent annual increase, ending stocks in the U.S. – mainly due to a decrease in harvested area and yields – are currently expected to decline 14.6 percent. USDA’s season-average farm price forecasts were left relatively unchanged at $4.60 per bushel (midpoint).

With Argentine drought dominating the soybean market news, global soybean production is expected to edge slightly lower to 346.92 million tons. Forecast to increase 4 percent to 300.1 million tons, consumption continues to fall short of production growth. Ending global stocks are thus expected to rise to 98.14 million tons. Despite the decrease in global production, US exports are forecast to decrease due to slower shipments and a 30-year low in the crop’s protein level. With US ending stocks forecast to increase to 530 bushels, domestic season-average farm price is currently projected between $8.90 and $9.70.

Mostly due to an increase in Chinese supply, global soybean meal production is currently forecast to reach 235.6 million tons, a 4 percent annual increase and a minor downward revision from January. With consumption expected to demonstrate a 5 percent year-on-year gain, global ending stocks are forecast to edge 9 percent lower to 11.24 million tons.   

With India expected to import a record 12.5 million tons of rice in the 2017/18 season year, USDA’s rice forecasts remained unchanged in February. Global production is projected to demonstrate a minor decrease to 484.3 million tons, whereas consumption levels are expected to remain nearly unchanged year-on-year at 481.75 million tons. Global ending stocks for the 2017/18 season year are currently seen at 140.79 million tons.

In its February cotton report, USDA was forecasting global cotton production at 121.37 million bales, implying a 13.9 percent increase year-over-year. With a forecast 5 percent annual increase in total consumption, global ending stocks were estimated at approximately 88.6 million bales. Nonetheless, cotton’s fundamental outlook has seen a significant improvement following the International Cotton Advisory Committee’s data release in early March. With an improved ending stocks forecast, agency’s data calls for the lowest ending stocks level since the 2011/12 season year and a cotton market deficit.  

As the market continues to evaluate the prospects of a record Brazilian crop this season year, coffee futures contract has a notable support line stretched among the minimum points of 2013 and 2017, currently at 115.5 cents per pound. Whereas a break below the 115 level would probably imply a downward move towards approximately 140 cents per pound, current large trader positioning – a near-record net short – and bearish sentiment might signal a potential reversal in the coming quarters.  

With no major news updates in February, sugar prices remain pressured by extended overproduction. Having touched the 7-month low of 12.96 cents per pound on the 27th of February, sugar futures contract maturing in May saw a significant end-of-the-month on the consequent day. Large traders maintain a significant net short exposure to the sugar futures contract.