Ample Corn Supply Limits Room for Futures Price Rebound
After the sharp decline in mid-to-late May, since the beginning of June, Dalian corn futures have stopped falling and stabilized, maintaining a low-level oscillating trend. Looking ahead, domestic corn supply remains ample, while demand is unlikely to pick up, and coupled with the large influx of imported corn and substitutes, the room for corn futures to rebound is limited.
Spot Market Fails to Thrive in Peak Season
In previous years at this time, as corn supply gradually entered the lean period between old and new crops, spot corn prices tended to keep climbing. This year, however, spot corn prices have been relatively stable. According to monitoring, the current corn price in Henan, a main producing area in the Huang-Huai region, is 2160-2200 yuan/tonne, in Hebei it is 2200-2240 yuan/tonne, and in Shandong it is 2310-2400 yuan/tonne. Corn prices in the main producing areas of Northeast China are mostly 2110-2300 yuan/tonne, little changed from the previous two months, but down 150-200 yuan/tonne compared with the same period last year. Corn buyers and traders, having learned from last year's experience, actively purchased during the concentrated corn marketing period and maintained large inventories, so there is currently no fear of raw material shortages, and thus the seasonal rally has failed to reappear.
Corn Demand Remains Sluggish
Corn demand mainly includes feed demand and deep-processing demand. On the feed demand side, the hog breeding industry is still in a contraction phase. According to a report released by the Ministry of Agriculture, in April the hog inventory was 387 million head, down 9.4% year on year; the breeding sow inventory was 39.71 million head, down 14.9% year on year. The hog inventory data has fallen sharply. Poultry also failed to thrive in the peak season; egg prices did not show a seasonal rise around the Dragon Boat Festival, and in some areas they once fell below the 3 yuan/jin mark, dampening breeders' enthusiasm for expanding their inventories.
On the deep-processing side, due to weak prices of downstream products, processing profits have continued to hover in negative territory, the operating rate of corn deep-processing enterprises is not high, and their support for corn prices is relatively weak. Currently, corn starch processing profits are still falling, and in Shandong they have dropped to -119 yuan/tonne. Demand for corn starch is weak, while prices of by-products such as protein powder and fibre continue to slide, gradually increasing the operating pressure on starch manufacturers; in some areas manufacturers have begun to reduce processing volumes to ease their own pressure.
Ample Supply, Increasing Substitutes
From the production perspective, corn cultivation currently yields stable returns, and farmers have expanded corn planting area year after year, squeezing the sown area of agricultural products such as soybeans and miscellaneous grains, causing domestic corn output to increase year after year. International corn prices have steadily moved lower, widening the price gap between domestic and international corn, and with generous import profits, this has stimulated an increase in corn imports. According to customs statistics, in May China imported 403,881 tonnes of corn, far higher than the 140,837 tonnes in April, and up 410.45% from the same period last year. From January to May, China imported 1,777,619 tonnes of corn, up 31.69% from the same period last year.
In addition, because there is no quota restriction, imports of coarse grains that can substitute for corn, such as sorghum, have surged. The latest report from the US Department of Agriculture shows that in 2015/2016, China's sorghum imports are expected to reach 9 million tonnes, an increase of more than 2,000 times compared with 0.4 million tonnes in the 2010/2011 marketing year. Imported corn and miscellaneous grains have largely squeezed out the demand space for domestically produced corn, causing the corn price at southern ports in the sales areas to be inverted relative to the corn price at northern ports in the producing areas, thereby suppressing the overall level of domestic corn prices.
From a technical perspective, after three months of high-level oscillation, the breakdown and decline of corn futures in late May signalled the arrival of a corn bear market. The bulls' counterattack in early June was also blocked at the neckline, indicating that the downward trend remains. In terms of operations, one may continue to sell short on rallies.