Last week, the US Department of Agriculture (USDA) released a report detailing its estimates for US crop production this season, and it will not have made easy reading for grain farmers. The US is headed for record corn (maize) and soya bean harvests, with the USDA forecasting an 11% year-on-year increase in US corn production to a massive 385m tonnes, while soya bean production is forecast to increase 3% from 2015 levels to more than 110m tonnes.

This volume of production is keeping grain prices on the floor for another year, with Chicago corn prices currently trading just above the $3.30/bu ($130/t) mark – a long way off the key $4/bu threshold.

It’s hard to believe that in mid-June, Chicago corn prices were trading at close to $4.50/bu ($177/t) after severe flooding in parts of Argentina and drought in Brazil caused significant volatility in grain markets.

However, according to Rabobank’s Stefan Vogel, corn prices are back to where they should be.

“There was a mixture of a lot of things going on. First of all there were weather issues in South America with flooding in Argentina, where basically about 9-10% of the crop was damaged and the crop was reduced in volume.

“Then Brazil had drought issues late in the season and production came in about 95m or 96m tonnes (below the forecasted 100m tonnes).”

At the same time the weather picture in the US was looking extremely dry and grain prices spiked, primarily due to a lot of excitement from hedge funds.

“But then suddenly the weather forecast in the US improved and we’re now back in a situation where corn has fallen well below $4/bu and I think that’s where it belongs in terms of current supply and demand,” says Vogel.

Global supply

Even outside the US, Vogel sees a world market currently well supplied with grains this year. In 2015, both Russia and the Black Sea region (Ukraine) had “significant issues” due to dryness which affected yields dramatically.

“This year the situation looks much better. Both countries have achieved quick gains in (planted) acreage,” says Vogel.

The USDA is now forecasting Russia to become the world’s largest wheat exporter this year, with shipments set to reach a record 30m tonnes as a result of increased production to more than 70m tonnes.

The only region where significant declines in production are expected is Europe, as poor weather conditions on the continent in May and June have reduced market expectations.

In France, yield estimates have been slashed after severe flooding during the summer. The French agriculture ministry is now forecasting a near 12m tonne decline in domestic wheat production this year, to just over 29m tonnes, the smallest French wheat harvest in 30 years.

In Australia, Vogel says growers have finished planting in the last month and the weather has been really helpful so far.

“There’s a lot of moisture in the ground and therefore the season is off to a good start. However, there is still a long way to go and the harvest will be very late this year in December. This means we still have the critical period ahead of us in Australia, with plenty of time for something to go wrong with crops,” says Vogel.

Increasing demand

On the demand side, Vogel says it is interesting to see the rising demand coming from new regions such as sub-Saharan Africa.

“When you talk about the African market, everybody always thinks about the north African countries (Egypt, Algeria, Morocco, Libya etc) but if you look at the sub-Saharan region you will see very strong imports over the last few years.

“I expect that within the next five to seven years the sub-Saharan region of Africa will import more wheat than the North African countries,” he added.

Looking further east, Vogel says Chinese demand for soya beans has really taken off in the last few years, making it the world’s largest soya bean importer. Soya bean imports by China will exceed 83m tonnes this year and Vogel expects them to continue to grow in the coming years.

Chinese importers actually crush the soya bean themselves with growing demand in China for both the soya bean crush (meal) and soya bean oil.

Firstly, Vogel says, the greatest demand for the soya bean meal is pig production with more than half (57%) of the world’s pig herd in China.

Secondly, the soya bean oil is then used for cooking or frying as China is a massive consumer and importer of cooking oils every year.

The other interesting development in the Chinese market this year, according to Vogel, has been the changes made to the country’s corn stockpiling scheme by officials in Beijing. Previously, the Chinese government set the price of corn (usually 50% above global market prices) in order to incentivise domestic production.

However, China is now oversupplied with huge stores of domestic corn and is replacing its stockpiling policy with a subsidy system for grain farmers – the biggest agricultural policy reform in China for a decade.

In a bid to improve efficiency and reduce cheaper imports, Chinese growers will now receive the market price for their corn, with the government providing a subsidy.

“China is squeezing out some of the feed wheat imports that are competing with domestically produced corn,” says Vogel. “That basically affects barley imports out of Australia and sorghum imports out of the US. All of these imports into China should decline quite a bit so you’re saving maybe 10-15m tonnes of feed grain.”

Vogel says the main question will be how fast China offloads its massive corn stocks on to the local market, which has the potential to suppress grain prices.

Tight supplies

The other country that Vogel says needs to be watched closely in the coming year is Argentina.

Earlier this year, a new liberal government in Argentina fully removed export taxes of more than 20% on wheat and corn shipments and lowered the export tax on soya beans by 5%, to 30%. At the same time, the Argentine currency was allowed to float freely, resulting in its value declining.

All of these factors combined to make wheat and corn exports extremely attractive for Argentine growers. With a high tax still remaining on soya bean exports, Vogel says it is likely there will be a shift in acreage this autumn to corn and wheat.

“Right now the soya bean acreage is much, much bigger than corn or wheat but we will see some of these acres given over to corn and wheat next season. The market expectation is that Argentina will increase its wheat area by 20-40% and also can add quite a bit of area in corn plantings.

“If you look at the global balance sheet Argentina is a country that needs to be monitored very closely as soya bean markets are relatively tight on supply.

“Not only because if they lose too much area it will reduce production volumes but also if LaNina materialises it could result in yield issues.”

Overall, the picture that has emerged once again this year is a world market well supplied in grain according to Vogel.