wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(November 3, 1997) CORN: FINANCIAL MARKET TURBULENCE STIRS GRAIN MARKETS–The last week has been very treacherous for the grain markets because the most influential factor has been the devastation in world financial markets. In particular, the markets are trying to assess what happens to U.S. corn and wheat exports when Asian markets suffer huge declines In the value of their currencies. The first inclination is to think that Asian economies will have less resources available to purchase U.S. grains, thus U.S. exports will decline and ending stocks estimates will grow. Accordingly, U.S. markets weakened. We believe the market has over reacted on the downside.
The primary economies in question are located mostly along the Pacific Rim: Hong Kong, Malaysia, Philippines, Taiwan, South Korea, Thailand, Japan and China; however, Mexico also was hurt by the spillover effect. Three currencies (Hong Kong, Japan and China) were essentially unchanged as of October 28, mainly because the central banks in these countries link their currencies to the U.S. Dollar. Thus, the banks defend their currency when it starts to fall relative to the dollar. Last week, due to the debacle in the overseas financial markets. speculation grew that these countries did not have enough financial reserves to adequately defend their currencies.
Based on information to date, we believe the financial reserves in these countries should not be in question, and they should import U.S. grains as expected. Hong Kong, where most of the eyes in the financial world were glued over the last week, does not even show up on the world grain import radar screen, let alone for the United States. Thus, financial turbulence in Hong Kong will not affect trade patterns of U.S. grains.
Japan, a major importer of U.S. grains (and a favorite cash customer), should continue to purchase both U.S. corn and U.S. wheat. As one of the top five U.S. corn customers. Japan bought about 15 million tonnes of U.S. corn in 1996/97 out of total imports of 15.5 million. The USDA projects that Japan will import 15.5 million tonnes of corn again this year, of which more than 95% will be of U.S. origin. Thus far, Japan has committed to 5.5 million tonnes in the first two months of the marketing year, which is well ahead of schedule. In terms of wheat, the USDA projects that Japan will import 6.2 million tonnes from the world markets in 1997/98. Last year, Japan imported 6.264 million tonnes, with 52% from the United States. So far this year, Japan has committed to buying 1.728 million tonnes out of an expected 3.0 million tonnes; this amount is about 500,000 tonnes–ahead of the pace needed to meet that goal.
Similarly, China can be a large importer of U.S. grains. Although the USDA currently projects that China will import only 250,000 tonnes of corn (expected to be of U.S. origin) versus essentially none the previous year. Many market participants feel that the Chinese corn import figure can grow due to: (1) this year's drought-ravaged corn crop; and (2) logistical displacement of corn production versus consumption. (Additionally, recent Chinese corn exports out of northern ports add a bearish tone to U.S. corn markets in the short term. but could spell greater imports into southern ports for the latter part of the year.) China has not yet booked any U.S. corn for the 1997/98 season.
The bigger question with China is how much U.S. wheat it will import. Even though China is coming off a bumper crop in 1997/98 (estimated by the USDA at 121 million tonnes and as high as 124 million by the trade), most of its wheat is unsuitable for millers: thus high- quality U.S. wheat should be in demand. The USDA projects that China will import 2.0 million tonnes of wheat from the world this season versus 2.8 million tonnes in 1996/97, of which 1.1 million was from the United States. To date. China has committed to only 147.000 tonnes of U.S. wheat for this season. Even though Chinese commitments of U.S. wheat are slow, the tonnage is small enough that a couple of moderate purchases could easily meet the year's expectations. Thoughts prevail that when China and the United States discuss the U.S. trade deficit, it will spur some purchases of U.S. wheat, with estimates as high as 700.000 tonnes. (Although the amount sounds significant, it is only a drop in the bucket in terms of the $31 billion trade deficit calendar-year-to- date).
Currency values in the remaining six countries (Thailand, Malaysia, Taiwan, Philippines, Mexico and South Korea) have fallen no less than 7% and as much as 18% against the dollar since September 1. These six nations have one thing in common: They are heavily dependent upon world market in order to feed their population. Thus, whether they like it or not, they will have to come to the world markets for food and feed in good times and in bad, no matter if prices are high or low.
Four of these countries–Mexico, South Korea, Taiwan and Malaysia–are projected to be among the top six world corn importers for 1997/98, with amounts totaling almost 21 million tonnes, or 30% of projected world corn trade. Among U.S. customers, Mexico, South Korea, and Taiwan are typically in the top five, while Malaysia is in the top eight. Last year, these four countries imported 14.6 million tonnes of corn out of their 19.5 million total from the United States, accounting for 32% of U.S. corn exports. Obviously, these countries depend upon the United States and other corn-producing nations, such as China, for corn imports and will continue to import grain for both livestock and human consumption. These four countries are expected to take 15.0 million tonnes of U.S. corn this season, but have committed to only 2.9 million so far. All of these countries are well behind the pace needed to meet our export projections. The apparently slow pace is not attributable to currency changes but rather the cheaper Chinese corn offered for export following harvest (even though production was greatly diminished by adverse weather). The Chinese have been able to utilize their freight advantage, as well ship grain in smaller vessels that are easier to handle in some of these smaller ports. The question that remains unanswered is: How much more corn is available out of China, and how much will Chinese exports cut into the 1997/98 U.S. corn export program? The general perception is that a large U.S.-based grain trading company was long 3.0 million tonnes of Chinese corn, thus that level of sales in China might be a target to shoot for versus the USDA's current estimate of 2.5 million tonnes, most of which will come at the expense of U.S. corn exports.
These half-dozen countries are not nearly as important to the world wheat trade. They imported 10.6 million tonnes from the world market, of which 60% was from the United States, in 1996/97. This year, the USDA has them pegged at 9.9 million tonnes of imports, of which the United State probably will supply 5.5-6.0 million tonnes. Thus far, these countries have 2.4 million tonnes on the U.S. books, which is about 42% of their expected U.S. offtake and about on schedule to meet the target of 5.5-6.0 million tonnes.
In sum, we do not expect that falling currency rates will have much impact on U.S. grain exports to the importing nations along the Pacific Rim and Mexico. A bigger risk in the corn market is China's export program to traditional U.S. corn customers. The risk to the U.S. wheat export program is the general availability of wheat around the world. This plentiful supply will become more apparent as estimates for Australian wheat production approach the 18.0 to 18.5-million-tonne mark and as Canadian production estimates grow slightly above the USDA's current forecast of 23.5 million tonnes. Argentine wheat production got off to a bad start last May prior to dormancy, but recent rains have been more than ample and production is expected to rise from earlier estimates, perhaps exceeding 13.0 million tonnes. (As a caveat for Argentina, continued rains as the crop matures will hamper quality first, and then possibly production.)
Tom Levis
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