Corn: Supply and demand turn tighter, providing medium to long-term upward logic

Domestic supply and demand: shifting from loose to tight, providing a medium to long-term upward logic

1、 Production reduction has been implemented, resulting in a decrease in costs

The corn harvest for 2024-25 has been completed, and the yield has basically settled. The Ministry of Agriculture and Rural Affairs predicts that the domestic corn production in November 2024 will be about 297 million tons, an increase of 8.17 million tons year-on-year. According to institutional estimates, due to weather conditions, the average yield of corn in China has decreased, and the planting area of major planting belts in China has also decreased, leading to a reduction in corn production in the country. The research team of Steel ｕｎｉｏｎ Agricultural Products predicts a corn production of 271 million tons, a decrease of 9.01 million tons year-on-year, with a decrease of 3.21%; China Huiyi.com estimates production to be 280 million tons, a year-on-year decrease of 2.6%. Overall, production has decreased year-on-year, but the reduction in production is not as significant as expected. According to Mysteel's research on agricultural products, due to a significant decrease in land rental costs, the cost of corn cultivation in Northeast China has decreased by 55-210 yuan/mu to 1135-1514 yuan/mu this year. After calculation, the port conversion cost is approximately between 2150-2200 yuan/ton.

2、 The feed industry is facing a rebound in production capacity, with low raw material prices for enterprises to use as needed

Feed demand accounts for 60-70% of the total corn demand. According to data from the Animal Husbandry and Veterinary Bureau of the Ministry of Agriculture and Rural Affairs and the China Feed Industry Association, the total industrial feed output in China in 2023 was 321.627 million tons, an increase of 6.6% over the previous year. Looking at different varieties, except for a decrease in aquatic feed, the yield of all other varieties has increased. With the promotion of pig production capacity reduction, the inventory of sows capable of breeding decreased to 39.92 million in March 2024, resulting in a decrease in feed demand. From January to September 2024, the total industrial feed production in China was 227.87 million tons, a year-on-year decrease of 4.3%. In terms of inventory, data from the Ministry of Agriculture and Rural Affairs shows that the number of sows capable of breeding increased for five consecutive months from April to September, reaching 40.62 million on a month on month basis; According to data from Steel ｕｎｉｏｎ, the inventory of sows capable of breeding from February to September has increased to approximately 4.99 million for eight consecutive months compared to the previous period. According to a 10 month slaughter cycle, it means that from the fourth quarter of 2024 to July next year, the number of live pigs will steadily increase, and whether in terms of piglet growth or medium to large pig inventory, the increase in pig supply pressure can be considered a high probability event. Therefore, there is a certain guarantee for feed demand.

Due to the reduction of pig production capacity, domestic pig prices rebounded from the bottom in January 2024 and reached a high point in August. The market price of standard pigs has risen from a peak of 14.05 yuan/kg at the beginning of the year to 21.15 yuan/kg, an increase of about 5.05%. The market price of fat pigs has risen from a peak of 14.22 yuan/kg to 21.45 yuan/kg, an increase of about 4.87%. As a result, pig farming has generated profits. As of August, the highest profit from purchasing piglets for breeding reached 722 yuan/head, and the highest profit from self breeding and self raising reached 881 yuan/head. The pig farming sector of A-share companies has significantly turned around losses year-on-year, and has generally delivered impressive third quarter performance reports. In addition to the rebound in pig prices, the low prices of feed such as corn and soybean meal, as well as the company's own cost reduction and efficiency improvement, have also become important reasons for the significant improvement in profits of pig enterprises. However, starting from the fourth quarter, due to supply pressure and weak demand, breeding profits have gradually shrunk. Coupled with the bear market cycle of corn spot prices, companies have chosen to maintain a strategy of on-demand harvesting and low raw material inventory, which may be difficult to drive corn to experience rapid growth.

3、 The startup rate continues to recover, and the demand for deep processing industry may increase steadily

Corn is widely used in starch and downstream deep processing fields, with deep processing demand accounting for 25-30% of the total corn demand, with an absolute quantity of about 80 million tons. In 2024, the sustained improvement of the macro economy will drive the consumption of the corn industry and push the utilization rate of the corn deep processing industry to a historical high. According to Mysteel data, the average operating rate of the starch industry from January to October 2024 was about 63.31%, and the average operating rate of alcohol was 60.83%, compared to 53.66% and 59.05% respectively in the same period last year. Due to the increase in operating rate, the demand for raw materials in the deep processing industry has increased by about 2 million tons. At the same time, the price of raw corn has continued to decline, and corporate profits have turned from negative to positive. In 2024, the average profit in Shandong, Jilin, Hebei, Heilongjiang and other places has changed from a loss of 14 yuan/ton to a profit of 26 yuan/ton. On the one hand, some production capacity continues to be put into operation, and on the other hand, the year-on-year decrease in corn purchase prices this year has led to the deep processing industry maintaining a good profit level, and enterprises actively purchase corn. Overall, it is expected that the consumption of corn industry in China will reach 84.5 million tons in 2024-25, an increase of more than 2 million tons year-on-year.

4、 The import of substitutes may tighten, and the demand for corn may be released

In 2023-24, a large number of substitutes will flow into feed enterprises, such as wheat sprouts, feed rice, and imported grains, continuously squeezing the demand space for corn and accelerating the decline in corn prices. In contrast, in the first half of this year, the substitution of wheat and feed rice may be significantly reduced, and the substitution of imported grains will also be tightened. The pressure of substitution will gradually decrease, which may effectively release the space for corn feed.

1. Corn imports may decrease in quantity, and the import cost is conducive to providing bottom support

In 2023-24, the global grain production and supply will be abundant, leading to a continuous decline in grain prices. The cost price of corn imported from Brazil and the United States to China is about 2000-2200, and the increase in import profits will effectively promote corn imports. In that year, China imported a total of 23.46 million tons of corn, an increase of 4.77 million tons year-on-year, with a growth rate of 25.5%. One is to break away from dependence on a single source of imports and effectively prevent trade conflicts. China has gradually achieved diversified imports, and since 2023, Chinese buyers have significantly reduced their purchases of US corn. Secondly, due to severe weather conditions leading to reduced corn production, the export supply of Ukrainian corn in 2024-25 may significantly decrease to 15-17 million tons, far lower than the previous year's 30 million tons. This means that there is a possibility of a decrease in the amount of Ukrainian corn imported into China. Thirdly, following the reduction in production due to adverse weather conditions in 2023-24, the Brazilian National Commodity Supply Company preliminarily predicts that corn production will increase by 3.5% to 120 million tons in 2024-25. However, due to fierce international market competition, China's corn import demand may slow down, and it is expected that the country's corn export volume will decrease to 34 million tons, a year-on-year decrease of 5.6%. In addition, there are rumors in China that the policy will tighten imports of corn and substitutes. It is expected that the pace of corn imports in China may slow down in 2024-25. In terms of price, domestic corn prices have fallen to around 2000-2100 import costs, eroding profits. While limiting import quantities, import costs will also support corn prices.

2. Under restrictive import policies, grain substitution or reduction in quantity is the main approach

In 2020-21, temporary storage and destocking were completed, and grain imports began to increase. The cumulative import of corn and corn substitutes reached about 55.56 million tons, setting a new annual high. In 2023-24, the cumulative imports were 50.55 million tons, compared to 38.25 million tons in the same period last year, an increase of 32.15% year-on-year. The significant increase in grain imports has driven the continuous decline of domestic corn. In order to alleviate the pressure of domestic oversupply, boost corn prices, and protect farmers' income, there are rumors in the market that relevant government departments have held talks with several domestic grain import enterprises in Beijing, suggesting to stop purchasing barley and sorghum from abroad and control the quantity of grain imports. This means that in the context of restrictive import policies and weak corn prices, grain substitution or quantity reduction is the main approach. According to the shipping schedule calculation, the import quantity of wheat, sorghum, barley, and corn in the fourth quarter of 2024 may be around 5-6 million tons, while the same period last year, including feed rice, barley, sorghum, barley, and corn, was around 26 million tons.

3. Wheat may be mainly replaced through normalization, and wheat prices may become the top range for corn. In addition to import substitution, domestic wheat and rice are still potential factors for replacing corn.

In the long-term weak atmosphere of import substitution and corn prices, it may be difficult for feed rice to enter the market. At the same time, whether wheat can flow into the feed industry in the new year depends on the wheat production and price trend in the third quarter of 2024. The possibility of wheat replacing corn cannot be ruled out, but except for extreme factors such as weather, it is expected that the possibility of large-scale substitution is small, and it will be mainly replaced on a regular basis. In the field of animal feed, wheat can ｒｅｐｌａｃｅ corn. Both are used as energy feed, and their energy values are basically the same. However, the protein content of wheat is 6 percentage points higher than that of corn, so the price of wheat is usually 100-200 yuan higher than that of corn. And wheat prices may become the top range for corn in the future, otherwise it will attract wheat to flow into feed companies. At present, the wheat price is around 2450, which will also become an important pressure range for corn prices under the premise of stable wheat prices and small fluctuations.

5、 Under the contango structure, futures futures in the distant months will carry heavy loads and move forward

At the turn of the new and old years, domestic corn production has decreased, imports of substitute products have been restricted, the inventory of sows capable of breeding has steadily rebounded under the new cycle, and the operating rate of the deep processing industry has continued to rise year-on-year. A series of favorable factors may guide the annual supply and demand to shift from basic looseness to tightness, and promote the formation of a contango term structure in the corn market with near weak and far strong futures. Futures and spot prices usually show futures premiums and negative basis spreads, giving the market the opportunity to short far month futures, resulting in an increase in warehouse receipts and a shift in supply pressure. As of December 3rd, there were 78216 registered warehouse receipts for corn futures on the exchange, with a total of nearly 800000 tons of corn spot, at the second highest level since 2018. It can be seen that the spot price of corn still faces significant supply and inventory pressure. When the speed of spot sales accelerates, the supply pressure is reduced, and accompanied by the profit of holding positions in the early stage, the near weak and far strong term premium structure may be repaired, which will drive an increase in the premium of futures prices. It should be noted that although the sales progress of corn in Northeast China, North China, and the whole country has accelerated year-on-year as of the end of November, there are still several waves of concentrated volume increase from this year to the first quarter of 2025. So, the supply pressure will continue to be transmitted through the contango structure to Yuanyue, and Yuanyue futures contracts will still bear some pressure.

6、 The price keeps falling and the risk of forced warehousing gradually decreases after concentrated supply

Corn gradually went public in October, and with the boost of increased reserves, prices stopped falling and rebounded, with the index contract reaching a maximum of 2267. During the week from the end of November to the beginning of December, corn futures plummeted across the board, with index contracts falling below 2200 and hitting a low of 2074. In recent months, the 2501 contract has fallen below 2200 and hit a low of 2035 through online consultation. This has led to a wonderful situation of short selling and long selling. The logic of forced warehousing lies in two aspects: firstly, it is in a period of concentrated volume increase, with rapid accumulation and recovery of port inventory, demand being used as needed, and spot prices falling endlessly; secondly, the warehouse receipts have increased significantly year-on-year, and if bulls passively receive goods, they will face the risk of spot sales losses. In the end, China National Grain Reserves Corporation issued another announcement to increase storage, which supported the bottom of corn and led to the end of forced storage, but also guided the market to the bottom. The sales progress of corn this year is relatively fast, which may lead to lower than expected sales pressure in the future. Therefore, after the price stabilizes, it is not easy to establish this type of forced warehouse conditions.

7、 Logical sorting and future prospects

In 2024-25, the planting area and yield of corn will both decline, and it is expected that the total domestic output will decrease by about 10 million tons compared to the previous period; On the import side, there is currently a trend for the country to slow down the import of corn and its substitutes. Starting from the fourth quarter of 2024, imports may begin to decrease, with an expected comprehensive import volume of around 35 million tons, a year-on-year decrease of 15 million tons; On the demand side, although the capacity recovery is limited compared to the previous pig cycle, it is still in an upward cycle. It is expected that the demand for feed will recover by 5-10 million tons, and the demand for deep processing may maintain a stable and increasing state. From 2023 to 2024, the supply and demand of corn will be loose by about 5-10 million tons. Taking this as the starting point, and considering the annual inventory transfer and the start of storage increase, it is expected that the supply and demand pattern will be tight by 20-25 million tons in 2024-25. Overall, the supply and demand pattern for this year will shift from loose to tight, providing fundamental logic for the rise in corn prices. At the same time, the bearish bullish trend at the end of November and early December 2024 is conducive to releasing market pessimism in advance and compressing further downward space, as well as reducing the probability of such forced positions in the later stage. In addition, after falling below the cost line, the possibility of further deep decline may be significantly reduced.

However, there is also significant resistance to the significant increase in corn prices. Firstly, there will be a concentrated increase in corn production from the fourth quarter of 2024 to the first quarter of 2025, with seasonal selling pressure and a relatively positive attitude towards upstream grain sales. Secondly, in recent years, the continuous losses have led to the loss of inventory mentality among middle and downstream enterprises, and they generally adopt the strategy of harvesting and using as needed, which is difficult to significantly boost corn prices. Thirdly, the term structure of contango leads to a shift in supply pressure. Overall, this year may be signaled by a gradual decrease in spot supply and inventory pressure, showing a fluctuating and strong trend. The price range may be between 2000-2450. Strategically, pay attention to the warehouse receipts and price dynamics of the exchange, and invest in long-term multiple orders for hedging at low prices. For reference only.