FORT COLLINS, Colo. (Reuters) - United States soybean supplies surged above 900 million bushels in 2018 when China shunned U.S. beans at the start of the trade war, setting a new high for domestic soybean stocks. Prior to that, discussion of volumes over 600 million bushels was extremely rare.
But now, U.S. soybean supply projections for August 2021 are on par with pre-trade war levels and corn stocks have become the eye-popping figure. At 3.318 billion bushels, the U.S. government’s prediction for 2020-21 U.S. corn carryout is by far the highest number printed by the agency in any month in more than three decades.
That estimate, issued by the U.S. Department of Agriculture on Tuesday, is also 58% larger than what is expected for 2019-20, which ends on Aug. 31.
There are two main reasons for this surge. U.S. farmers are seen producing a record corn crop, some 17% more than last year. And just as they started preparing to plant 97 million acres, farmers were hit by the coronavirus outbreak which choked off oil demand, sharply reducing domestic output of corn-based ethanol.
A carryout of more than 3 billion bushels immediately draws comparisons with the 1980s, when inventories were even larger.
But compared with demand, U.S. corn supply is predicted to be much lighter than in the 1980s, when government programs kept production at what was ultimately unnecessarily high levels. However, today may hold a thread of similarity to the 1980s based on the trade payments that growers have received since 2018.
Given USDA’s new figures for U.S. corn, the ratio of stocks-to-use, a measure of supply versus demand, is set at 22.4% in 2020-21, a 28-year high. That is up from an estimated 15.2% in 2019-20 and 15.5% in 2018-19.
That ratio is substantially lower than those observed in the mid-1980s, when corn stocks-to-use topped out at 66%. But those were different times.
Commodity price supports and government storage programs drove U.S. stockpiles to extremely high levels during the 1980s. This essentially encouraged overproduction since price determination and crop decisions were driven by policy instead of market needs.
Stocks-to-use at 22.4% in 2020-21 would be the largest in the Freedom to Farm era. That began with the passage of the 1996 U.S. farm bill, which eliminated annual supply control programs and decoupled planting decisions from program parameters, allowing acreage to be governed largely by market prices.
The previous post-1996 high was 20% in 2004-05, but that was also before the Renewable Fuel Standard or RFS era. The RFS introduced a considerable shift in domestic corn demand, taking off in 2007 as U.S. farmers increased their corn output to expand the use of corn-based ethanol in gasoline.
Since the RFS era began, the highest corn stocks-to-use was 15.7% in 2016-17, when the U.S. and South American harvests were record large. That year still holds the record for world corn output, though USDA predicts 2020-21 production to surpass it by 5%.
Price support still exists to some extent through various government crop insurance programs, but the situation is nothing like the 1980s. However, one could argue that the market has been uniquely distorted in the past two years based on trade payments received by U.S. farmers, and production has been impacted.
Market Facilitation Program payments almost certainly inflated corn output in 2019 when many farmers planted in terrible conditions, something they might have avoided had they not feared missing out on the check.
Stocks-to-use of 22.4% would be very large for the modern era, and there is a chance the estimate could increase even further depending on this year’s harvest and the duration of the virus impacts on the ethanol market.
However, a look at past initial stocks-to-use figures would suggest USDA does not tend to be overly optimistic early on about the U.S. corn supply and demand balance. In the last eight years, initial stocks-to-use was lower than the final twice, and one of those times was by half a percentage point.
USDA sees 2020-21 U.S. soybean carryout at 405 million bushels, which would be the lowest in four years, though the old-crop estimate jumped to 580 million on reduced exports.
Anomalously high volumes of soybeans still need to be sold and shipped by Aug. 31 in order to prevent the 2019-20 carryout from surging further, which adds more pressure to the new year.
As it stands, new-crop soybean stocks-to-use is projected at a four-year low of 9.4%, down notably from the 2019-20 estimate of 14.9%.
But in 2018-19, U.S. farmers produced a record-large soybean crop right as China slapped import tariffs on the American oilseed, and stocks-to-use exploded to 23%. That was the third-highest on record behind 1968-69 and 1985-86, at 35% and 29%, respectively.
The 2018-19 soybean situation was way more anomalous relative to history than is predicted for corn next year. Corn stocks-to-use of 22.4% in 2020-21 would be about 50% larger than the previous five-year average, but last year’s soybean ratio of 23% was bigger than its prior average by nearly 300%.
That suggests the combination of the trade war with the overproduction of U.S. soybeans in 2018 was a comparatively worse situation in terms of excess supply than what might happen to corn next year if ethanol woes continue and the crop is stellar.
But August 2021 is well into the future - the journey has only just begun.
The opinions expressed here are those of the author, a market analyst for Reuters.
Editing by Matthew Lewis