We ended the month of February with many of our agricultural markets at or near six-year lows. In most cases our move to these levels has been gradual. In fact, soybean futures just logged their narrowest monthly trading range in a decade. Implied volatility has responded in kind with soybean, wheat and corn volatility all trading at multi-year lows.
The key reports of the month were the balance sheets released at the USDA's Agricultural Outlook Conference on February 25-26. Those balance sheets represent the government's first attempt to reconcile supply and demand for the 2016-17 crop year. Despite conservative acreage numbers and optimistic demand numbers, all of their carry outs were bearish. Their corn and soybean price projections were only 15 and 30 cents below this year's projections, respectively, but they already appear too high and will require a mid-year rally to be achieved.
This past weekend Chinese Premier Li Keqiang told U.S. Treasury Secretary Jacob Lew that his country was going to make important changes to his country's coal and steel industries and that those changes would result in the elimination of 1.8 million jobs. That announcement was broadly covered by the world's financial press. At the same time, China is undertaking changes in agriculture that could impact far more jobs and those changes have received little press outside of agricultural circles. Specifically, China hopes to set aside environmentally sensitive land and to reduce its massive grain stocks. They have not set a specific target for grain inventories, but senior officials have said they would like to reduce corn planting by 10% and production by 5%. Their federal budget is expected to be released in a few days and should include monies for one or both of these projects.
The liquidation of their grain stocks is by far the more difficult of the two undertakings, and their futures market has been signaling their likely approach for some time. After several years of domestic corn prices between $8- $10 per bushel, nearby prices have fallen to $7.25 and forward prices are as cheap as $5.75. There is growing speculation that next year's support price will be as low as 1400 renminbi/ton, about $5.40 per bushel. Lowering the domestic price of corn by 40% in two years will have a huge impact on the rural economy and the subsistence farmers. China is estimated to have over 100 million farmers, many of whom could not survive without government assistance if China's domestic prices are normalized with world prices. Lower domestic prices are necessary if they hope to stem the flood of cheap imports which are being consumed ahead of domestic production.
Even if imports are greatly reduced and production is pared back, it will take years to draw down the corn stocks which have swelled to half of the world's carry out. One significant hurdle is that much of the grain is of poor quality, and another is that the corn will need to be sold at prices that are $3-$5/bushel below where it was purchased. That is why a budgetary allocation is required if this undertaking is to succeed. The size and pace of these government auctions will play an important role in price setting, both in China and overseas.
Elsewhere in the world, the U.S. is enjoying a brief period of being a competitive seller in the export corn market. We're competitive because Argentine offers have risen at the tail end of their crop year and because Brazilian exporters are focusing on soybeans, not corn. Unfortunately, even in these favorable times, we are not selling or shipping at a pace that will allow us to meet the USDA's projections.
While corn prices in China are moving to five-year lows, prices in Brazil have moved to near record highs, thanks in large part to their weak currency. This has encouraged additional safrinha corn acres. Argentina also planted more corn than initially planned due to favorable economics during their planting
window. Recall that their new President eliminated export taxes and that their currency also weakened. These extra acres and good weather have us on track for another record South American corn crop. Not surprisingly, South American corn is offered for export at a significant discount to the U.S. for any month from May through December.
Like corn, wheat is dealing with excess global stocks and a price war that is being fueled by weak currencies in key exporting countries. This price weakness has been exacerbated by the struggles of the world's top importer,
Egypt. Egypt is having internal disputes over quality specifications and has also had difficulty opening letters of credit. Those problems have combined to make Egypt a less desirable destination and have increased the risk premium that the sellers want before they will do the business. Their last three tenders have only attracted less than half the number of sellers that they traditionally see. France in particular is being hurt by these market disruptions. It is also suffering due to increased competition from Argentina and Russia. Russian grain shipments for the first eight months of their crop year set a new record.