FEATURE: South Korean corn buyers hedge with basis buying amid surging prices

Asian buyers have seen their feed costs escalate in 2021 with corn prices surging over 40% year on year.

This comes at a time when the largest corn producer in the world, the US reaps its corn harvest in September.

CFR Asia corn prices year-to-date averaged at $306.85/mt, up 44.2% from the 2020 annual average of $212.84/mt, based on S&P Global Platts assessments. On May 10, it hit a historical high of $349/mt CFR since Platts started assessing the price in 2016.

South Korean buyers hedge with buying on basis

South Korea demand for corn has been slow during the first half of the year but based on official custom import data, the country looks to increase the pace in the second half by buying as much corn in 2021 as 2020.

However, their buying pattern has altered amid the price surge.

Typically, the feed millers buy 3-4 months in advance but like many other Asian buyers, have resorted to wait until the arrival of spot shipments before entering the market.

On top of buying hand to mouth, they have switched from buying on flat price to buying a combination of floating and flat basis in order to hedge their positions. Based on Platts records, all the trades in 2020 and before were on flat price while in 2021, at least 15 cargoes transacted on floating basis or combination pricing.

Feedwheat loses advantage

In the first half of 2021, the switch to feedwheat contributed to the slow pace of corn imports. When feedwheat prices lagged the rise in corn prices and became cheaper, feedmillers started to change their feed formulations. This was happening not just in Korea, but also in Vietnam and China. The feedwheat/corn spread was observed at minus $28/mt, March 23 but in early August, the prices were at par.

With the feedwheat price advantage eroded as wheat market was hit by poor weather and global supplies started to tighten, demand for the product ceased and the last cargo that a Korean feedmiller bought was on July 27 for a Black Sea cargo for October-November arrival. The Korean buyers turned their focus back to buying more corn for feed and for November arrival corn imports purchased privately and in public tenders was over 1 million mt, about 30% higher on the month.

High corn prices may prevail despite US harvest

Brazil and the US are the top two corn exporters in the world. Corn prices have been climbing on the back of a fall in Brazil's production. South America has been facing chronic dryness and the worst drought in almost a century.

The US harvest marketing year for corn starts Sept. 1.

Yet with the upcoming harvest, and even with the expected improvement in US corn yield estimate, the corn market is still likely to remain tight this year, according to Pete Meyer, head of grains and oilseed analytics at S&P Global Platts Analytics.

"With the estimated yield for US corn at around 177 bu-177.5 bu/acre, the country's corn output can go up by 100 million-118 million bushels, which is not going to make a huge difference."

After an initial surge the US has not seen as much corn demand from the global market as hoped for. The only buyers of substance recently have been Mexico and Colombia. This is generating ideas that US corn values need to recede to generate additional demand, but this may not be the case, according to US-based agriculture research and marketing firm AgriVisor.

Most other corn suppliers in the global market are starting to deplete their reserves which will bring buyers to the US by default. This will give the US little competition in the global market for the next three to four months, AgriVisor adds.

Freight costs uptrend to slow

One of the key drivers of feed costs in Asia is freight which has reached record levels in the past year. Argentina, a key origin, has seen freight levels more than double from the range of $30-$40/mt in 2020 to a peak of $81.75/mt May 5, based on Platts assessments. The current price of freight forms 25% of buyers' import cost compared to around just 16% last year.

Panamax freight rates in both basins have been well-supported by the increased demand for agricultural commodities. In other commodities however, in particular coal, vessel demand has been lacking due to supply disruptions and high export price levels, said Matthew Boyle, Manager, Global Coal, Asia Power and Dry Bulk Freight Analytics.

"Throw in increasing port congestion and fleet inefficiencies and it is helping to support freight rates around current levels. Platts Analytics believes high commodity prices will see a pullback in Panamax and Kamsarmax freight rates in both the Atlantic and Pacific Basins as we move into the Q4 2021 period," Boyle added.

High commodity prices in other dry bulk markets have buyers struggling. "Something would have to give, which we believe is likely to be freight rates. KMAX9 average August rates were marginally lower month on month, so that in itself suggests there is some pushback on import demand in other commodities except for Agriculture," Boyle said.