Spotlight: Chinese purchases of US corn roil cash markets

A version of this Spotlight from S&P Global Platts Analytics(opens in a new tab) was first published January 27.

The Jan. 26 announcement that China purchased 1.36 million mt of US-origin corn rallied prompt corn futures roughly 20 cents and sent the national corn cash index up to $5.10/bu just a day after it traded at $4.75/bu -- the lowest level in two weeks. On Jan. 27, China bought 680,000 mt. Jan. 28 saw an additional purchase of 1.7 million mt while the week culminated on Jan. 29 with the second largest purchase of US corn in history, 2.1 million MT. All told, China bought 5.85 million mt of US-origin corn on the week, another record.

BY the time the week ended, the US national corn index closed at $5.25/bu, up 50 cents/bu on the week with prompt futures near $5.50/bu. The strong market reactions, both in cash and futures, implies the buys were somewhat of a surprise as high prices have not become the cure for high prices with little to no demand rationing in the export market, confirmed by the additional Chinese purchases throughout the week.

As the USDA was cutting 2 billion bushels off expected supply during the second half of 2020, it was simultaneously raising its total US export forecast by 500 million bushels (23%) to 2.65 billion bushels before setting back 100 million bushels in the January WASDE, still remaining 400 million bushels above the June estimate. All of the increase has come from Chinese imports, which saw a USDA forecast of 7 million mt in June rise to 17.5 million mt this month, an increase of 413.4 million bushels. The data suggests that the 2.1-billion-bushel export forecast by the USDA for the 2020-21 marketing year at its February 2020 Outlook Forum would have been on target without the Chinese buying.

As the chart shows, the last time Chinese corn production and demand were in balance was in the 2016-17 marketing year. At that time, imports were less than 2.5 million mt, the low point on the chart, with production of 264 million mt, demand of 255 million mt, and supply of 223 million mt. In the three years between the 2017-18 and 2019-20 marketing years, the negative imbalances were 4 million mt, 17 million mt, and 17 million mt with imports of 3.5 million mt, 4.5 million mt and 7.6 million mt, respectively. According to the World Agricultural Outlook Board (WAOB), that imbalance now stands at 26.3 million mt, a jump of 55% year on year, causing imports to total 17.5 million mt, up 10 million mt, or 130%, year on year. Production has remained consistent around 260 million mt for the past five years.

Bucking the adage that "the trend is your friend” back in May 2020, when they initiated 2020-21 coverage, the WAOB took a step backward with a 15 million mt deficit forecast on 275 million mt in demand against that consistent 260 million mt in production and 7 million mt in imports, curious then given the hog herd was in the process of being rebuilt from ASF. By July, the deficit was back to 17 million mt with imports still at 7 million mt. In September, it was 19 million mt, but still no change to imports at 7 million mt. In October, nothing changed in the WASDE.

By Oct. 22, however, China already had 10.5 million mt on the US export blotter in sales and exports, a number that's now closer to 17.5 million mt with the most recent buys. When asked about why the WAOB was slow-playing the Chinese import number at the Oct. 28 Data Users Meeting the head of feed grains at the WAOB, brushed aside the questions while pointing to the quota at the time and stating the WAOB "follows policy.”

What happened next was a travesty for price discovery as the WAOB's imbalance grew to 22 million mt in November with imports up 6 million mt, the first change all year, to 13 million mt. Then in December the gap grew to 25.5 million mt with imports up another 3.5 million mt to 16.5 million mt. As the chart shows, by January the deficit was/is 26 million mt with an import forecast of 17.5 million mt, according to the World Board. At this pace, the deficit could reach 30 million mt for 2020-21, a good starting number for 2021-22 in our opinion regardless of where 2020-21 ends up.