US corn growers face multiple woes amid China cancellation, Brazil threat

25 Apr 2023 | Mark Shenk

The cancellation of a US corn sale to China could be the first in a series of hits that US corn exporters may face in the months ahead, as surging Brazilian production eats into market share and adds to downward pressure on prices, market participants told Agricensus.

Private exporters reported the cancelation of sales of 327,000 mt of corn for China during the 2022/23 crop year, with confirmation coming through a US Department of Agriculture (USDA) update on Monday.

The cancelation came just weeks after Chinese sources had booked millions of tonnes of US corn in a move that renewed signs of demand and provided support to Chicago futures.

“The China corn cancellations are a big deal. While it wasn't a huge amount the concern is that there could be more cancellations coming,” Ted Seifried of Zaner Ag Hedge told Agricensus.

Corn futures dropped in Chicago on Monday after the Chinese announcement, with the May contract falling 12 cents per bushel (c/bu) to settle at just above $6.51/bu, while July futures declined by nearly 8 c/bu to settle at more than $6.07/bu.

Corn prices have been supported by a wave of Chinese purchases that began March 14 and have totaled 3.53 million mt (140 million bushels) for delivery during the 2022/23 marketing year, sources said.

“We think more China corn cancellations are coming, but not for a while as this was a big cancellation. Just 10 days ago they bought a little more than what was canceled this morning,” Terry Reilly, senior grain and oilseed commodity analyst at Futures International, told Agricensus. 

US growers will soon be facing what’s expected to be a record Brazilian corn crop this marketing year, and feel the impact of record soybean production, which is leading to a shortage of storage capacity in the South American country.

“The economics of those purchases seemed to be a little suspect for US origin versus cheaper Brazil supplies in the first place with the justification being a Brazilian production hedge or perhaps a lifting/capacity question from Brazil,” Kelly Herrick of Advance Trading said in an interview with Agricensus.   

Some analysts and brokers suspect that the Chinese purchases were a hedge against concerns about infrastructure and weather in South American exporters. 

“China had been on a streak of buying US corn, presumably to get them by until the second season Brazilian crop was available. It is a possibility, however, that some or a good amount of the purchases could have been a hedge for them against any weather issues in Brazil,” Seifried said.

The harvest of Brazil’s second corn crop, the safrinha, which begins in June and will gather steam in July is expected to rise to an all-time high of 95.3 million mt, according to the country’s food agency Conab.

“Seems like they have been able to secure 5-10 million bushels per week [127,000-254,000 mt] from Ukraine of late so between that and what they have on the books with the US it may be enough to tie them over until the Brazil safrinha harvest gets into the pipeline,” Advance Trading's Larry Shonkwiler told Agricensus.

In Brazil, the FOB Santos corn market has tumbled over the past two weeks, with July offers reported at a 5 c/bu premium to the July CME futures contract Monday, down from an 80 c/bu premium on April 13.

July is trading at a 25 c/bu discount to the same underlying contract.

"Part of the collapsing Brazilian FOB premium is linked to persistent strength in US futures. US ending stocks are forecast at multi-year lows in 2022/23, so prices are keeping exports uncompetitive to preserve domestic supply," a senior commodity analyst told Agricensus.

“Hearing Brazil is becoming aggressive in the marketing of corn with 100 c/bu cheaper values offered. Brazil’s crop will be large enough to continue to be offered into the world export market and will limit US exports in the near term,” Brian Hoops, president at Midwest Market Solutions, told Agricensus.

“So, at the very least it probably puts a halt to discussion of any additional US corn sales to China which suddenly makes the USDA export target look more unlikely with other Asian sales lagging so much,” Herrick said.

The Chinese cancellation also added to speculation that the USDA will have to lower its 2022/23 corn marketing year export forecast of 48.9 million mt when the projection is revisited in the next World Agricultural Supply and Demand Estimates (Wasde) report on May 12.  

“This could pave the way for USDA to lower their crop year corn export projection next month. Inspections still show shipments running 50 percent below USDA’s export projection,” Reilly said, in a move that would likely boost ending stocks and weigh on sentiment.

Accumulated exports for the current marketing year stood at 22.6 million mt in the week ending April 13, down by 38% from 36.6 million mt at the same point of last year, according to USDA data released April 20.

More trouble

Meanwhile, melting snow and rain in the middle of the US are adding to the woes of US corn producers along key arteries that feed into the main US Gulf export hub.

Rising water levels on the Mississippi River could slow the movement of the country’s agricultural goods to the Gulf Coast and global markets beyond, boosting shipping costs and further reducing competitiveness.

“I also think it is important to note that water levels on the Mississippi are rising, so exports could be affected if barge traffic is hindered,” Seifried said.

Both high and low water levels on rivers will complicate the movement of barge traffic, potentially leading to delays that tighten up the supply of barges and force barge freight higher.

Increased transport costs will feed into the final export price, with barge freight a key input into the ultimate US Gulf FOB value and something that potentially could push the origin out of competition - particularly in the face of mounting competition from South America.