Global grain supply-demand mismatch to continue at least for next 2 years: ADM

New Delhi — The global grain and oilseed supply-demand mismatch is expected to continue at least for the next 18-24 months on the back of strong demand and tight balance sheets, Archer-Daniels-Midland CEO Juan Luciano said Jan. 26.

"We see an environment of real demand, real effective demand happening out there," Luciano said in the company's fourth-quarter 2020 earnings call.

South America, the world's largest soybean producing region, is seeing weaker output prospects. So far, farmer selling of soybeans in Argentina for 2020-21 is sharply behind at 6% of the estimated crop, compared with 17% at the same time in the prior year, according to ADM.

The US Department of Agriculture sharply revised down US crop outlook recently, while supply issues are also expected in Black Sea on weather and export curb concerns.

"To be honest, our customers don't have a lot of inventory because everybody has been destocking or going hand to mouth with this [supply-demand] inverse," the CEO said.

China's role in 2021

China is expected to continue as a significant buyer of grains and oilseed in 2021, in the midst of lower inventories and remarkable recovery of its pig herds, according to Luciano.

China lost 50% of its pig population to the African swine fever outbreak in 2018 and 2019, leading to a sharp decline in agricultural demand. However, in the last one year, China's pig farming sector rapidly consolidated, leading to stronger recovery of the sector.

China's grain hunting spree has since accelerated, which is indicated from the country's record purchases of corn, wheat and soybeans.

On Jan. 26, the USDA said Chinese buyers booked 1.36 million mt of corn from the US for delivery in 2020-21 (September-October), with the sales almost inching closer to the top 10 US daily corn sales.

China's commitments for US corn in 2020-21 have surpassed 12 million mt, a record, according to the USDA data.

China is expected to buy 25 million mt of corn in the current marketing season and beyond, but not all will come from the US, Luciano said.

China has inventories "much lower than what the market is reporting there, you can see that in the prices that we've seen. And China didn't have a great crop, so we expect significant imports for both oilseed and corn," he added.

China's ethanol demand is also expected to benefit the US ethanol industry.

China has already made commitments to buy 200 million gallons of US ethanol in the first half of 2021, which is, in part, expected to contribute to a better balance in the US ethanol industry, ADM's CFO Ray Young said in the call.

Green shoots of recovery

"[W]e do see green shoots of recovery in 2021" for US ethanol industry, according to Young.

Supply-demand balance in the US ethanol industry is also expected to be supported by reconfiguration of ethanol capacity by various competitors and how small refinery exemptions will play out, the CFO said.

US ethanol industry suffered a major setback in early part of 2020 when stay-at-home orders due to the pandemic and tanking gasoline prices pummeled ethanol margins and led to huge demand loss, sending most of the industry offline or at a reduced capacity.

At one time in April 2020, US ethanol production sank to a 12-year low to 537 million barrels per day.

Margins

At the same time in April, ADM temporarily idled two dry-mill ethanol plants with a combined capacity of 575 million gallons.

However, the closure of the two plants was partially offset by increased demand for its industrial-grade alcohol, leading to ADM's ethanol business delivering higher year-over-year margins, according to Young.

Young indicated the two plants may restart in the first half of 2021, when sustainable margins are expected to return.

ADM's ethanol business performance in the first quarter of 2021 is expected to be significantly higher than Q1 of 2020, but below the fourth quarter of 2020, as industry challenges remain around ethanol margins, according to Young.

ADM's grain and oilseed business in Q1 of 2021 is also expected to be higher than the same period last year, driven by extremely strong North American export demand and continued healthy crush margins, Young said.

The company's adjusted operating profit for its Ag Services and Oilseeds segment in the fourth quarter rose 12.9% year on year to $834 million, ADM said.

The profits were mostly driven by higher export volumes and margins, capitalizing on strong global demand, particularly from China, Young said.

The company reported Q4 net earnings of $687 million, up from $504 million in Q4 2019.