Commodities 2021: US corn prices seen firm on global demand recovery

New Delhi — The US corn balance sheet underwent a volatile 2020, with prices finally ending the year at an over six-year high. But various factors suggest that 2021 could offer further support to US corn fundamentals and keep prices buoyant.

While substantial cuts to production estimates also supported sentiment, stronger prices for US corn have mostly been demand-driven, and that trend is expected to extend into 2021.

The most active March futures contract of corn on the Chicago Board of Trade touched an over six-year high of $4.80/bushel on Dec. 31, rising more than 40% since August.

Meanwhile, the US Department of Agriculture's season average farm price for US corn has also increased 30% since August to $4/bu in December.

Unprecedented high demand from China remained the leading factor for high prices of US corn. Export sales for US corn in 2020-21 was up 162% year-on-year from 2019 owing to the sharp rise in Chinese demand.

According to USDA, China is likely to import 16.5 million mt of corn in 2020-21 compared with the estimated 7.6 million mt in 2019-20.

Though Chinese purchases of US corn slowed down toward the end of 2020 amid domestic harvest, sharp increases in country's corn futures prices signal that import demand could resume in 2021.

US corn prices are likely to be supported by China's corn buying as markets expect the US to fulfill the major share of China's increasing appetite for corn. As of Dec. 16, China already committed for over around 11.6 million mt of US corn for delivery in 2020-21, compared to only 60,000 mt last year.

Recovery in China's hog herd -- hit by Asian Swine Fever -- and speculation around tight inventories of Chinese grain are additional factors likely to support strong demand for US corn from China into 2021.

Cuts to US and global supply

Shrinking supplies of corn from the major producers like US, the EU and Ukraine, with Argentina suspending its corn exports until March 2021, are also likely to keep corn prices firm into 2021.

US corn production estimates for 2020-21 (September-August) have fallen by 9.3% in the past six months to 14.5 billion bushels (368.49 million mt), and the year-end stock estimates have almost halved to a seven-year low of 1.7 billion bushels (43.23 million mt).

Global corn production estimate for 2020-21 has also dropped by 3.5% since May to 1.143 billion mt in December, while global stocks were down almost 15% at 288.96 million mt, according to the USDA.

Dryness in Ukraine, the US and parts of the EU has weighed down on the production figures.

Argentina -- a top corn exporter -- suspended corn exports until March 1, 2021, in order to ensure enough domestic supplies during the summer months giving corn prices in 2020 a last nudge.

Going forward, in the 2021-22 planting season, US corn acres will face competition from a strong soybean market that has also seen a price recovery in 2020.

In the US, corn and soybean are planted almost at the same time and compete for acres. Various market participants said that, in the battle of acres in 2021-22, soybean could emerge as the winner -- which could provide additional support to corn prices

Vaccines provide road to recovery

Successful COVID-19 vaccines are improving prospects of a global economic recovery. The expectation of more commerce has helped to lift the outlook in the energy sector, which extends to corn via the ethanol market.

Ethanol remains a major driver of US corn as nearly 40% of corn produced in the US goes into ethanol production.

COVID-19 lockdowns in the US put ethanol demand in the country to a screeching halt, putting various ethanol plants out of business. A successful COVID-19 vaccine, therefore, ignites hopes of speedy demand recovery in ethanol and therefore corn used for ethanol.

The December WASDE report estimated corn use for ethanol in 2020-21 to be at 5.05 billion bushels -- higher than the 4.85 million bushels estimated for 2019-20.

Demand for industrial ethanol from the US, which saw a rise during 2020 due to surge in demand for ethanol-based hand sanitizers because of the pandemic is also likely to continue to until Q3 for 2021, especially if there is any kind of delay in the vaccine, experts said.

DDGS demand seen strong

The demand outlook for US Dried Distillers Grain with Solubles (DDGS) is also likely to be supported into 2021 on continued buying, and with potentially limited soymeal supplies from Argentina.

Global feed demand in 2020 has not been as elastic as fuel demand, and feed demand from China and Southeast Asia, demonstrated by record buying, has been supportive of US DDGS exports.

Concerns over lower soybean crushing in Argentina, and subsequent lower soymeal production could possibly limit global supply, supporting higher demand for the substitutes -- DDGS and feedgrains.

US DDGS exports could, however, be challenged by poor container logistics -- particularly in the Chicago-area container export zone.

Production of DDGS in the US have reached highest levels since March 2020 despite poor Q4 ethanol crush margins.

Ethanol crush margins, which are at the lowest levels since May 2020, are pressured by firming prices for feedstock corn have not yet weighed on production, but traders remain uncertain about how long plants can run at the current margins.