The Perfect Storm: War in Ukraine, La Nina, Fertilizer Price Spike, Uneven Stockpile Distribution…
In this first edition of Orinda Park Insights, we examine recent global inflationary pressures and focus on food inflation, a critical component of overall inflation (eg. 13% of US CPI, considerably higher in emerging market countries). One of the most important food staples is corn, which is used as feed for livestock (45% in the US), for consumption by humans (10%), as well as in biofuel (45%). As a result of the strategic importance of corn in broad ranging industries, inflation in corn prices has a domino effect on broader asset categories.
In Section I, we review the structural drivers behind the current, uneven global supply distribution of corn, followed by key factors affecting the 2022 planting season in Section II, including La Nina, surging fertilizer prices, and war in Ukraine. In summary, our analysis shows that tight corn supply conditions could easily persist into 2023.
- Corn inventories are unevenly distributed across the globe, with China holding nearly 70% of global stocks
- La Nina brought drought to the western hemisphere, and LatAm crop yields decreased in 2021/2022 marketing year
- Fertilizer price surge is likely to deter US farmers from planting corn in the 2022 planting season
Section I: Historical Context
Low global supply and uneven global distribution have placed strains on corn supply.
1. Low Global Supply Since 2016
In the 2010s, the global corn market experienced multiple years of large surpluses that swelled global corn stockpiles to all-time highs. Stockpiles nearly tripled over the course of five years, peaking in 2016 at 351 million metric tons or 33% of annual global corn consumption, which translates to an average of 4 months of supply (source: USDA).
However, since 2016, modest demand growth coupled with stagnant supply led to four years of deficits which brought stockpiles down to 3 months of supply. Following the COVID outbreak in 2020, global corn stockpiles have remained at about 3 months of supply, elevated when compared to the prior decade but the bulk of this inventory resides in China and is inaccessible to the rest of the world.
2. Planting Seasonality Across Hemisphere and Uneven Supply Distribution
The supply of corn, including production and inventories, are unevenly distributed across the world. Roughly half of global production and 85% of global exports are controlled by four countries (Argentina, Brazil, US, Ukraine), while nearly 70% of global inventories are held by one country (China). Below, we take a closer look into the interactions between geography, planting season and trade flows and their impact on the global supply distribution of corn.
Corn production can be grouped into the Southern Hemisphere (Argentina, Brazil) and the Northern Hemisphere (US, Ukraine), each with a different seasonality. Argentina, Brazil, the US, and Ukraine are each major producers and exporters. The US consumes about 80% of its production domestically, while Argentina, Brazil and Ukraine produce corn primarily for export.
Additionally, China produces over one-fifth of the world corn supply but this is entirely consumed domestically. Global corn exports account for about 17% of global production. In the past decade, LatAm corn exports have grown to be as large as the US. Ukraine production and exports have also grown, with about one-third of its exports going to China.
3. What About China’s Stockpile?
Interestingly, China currently holds over 68% of the world’s corn stocks. China’s corn inventory to consumption ratio indicates an equivalent of 10 months supply to meet domestic consumption, compared to the rest of the world at only 2 months supply.
China’s massive buildup in corn stockpile started in 2011 when China introduced a price floor on the domestic corn market, which led to artificially high local prices and triggered import demand. Chinese stockpiles grew from 43 to 223 million metric tons between 2011–2016 and have remained elevated since (source: USDA). The stockpiling program was then discontinued in 2016. For the past several years, China’s corn consumption has exceeded domestic production, but the country has relied on imports to meet this demand rather than local inventories which are effectively off-limits to global markets.
Since 2020, the global inventory to consumption ratio excluding China dropped to below 12%, less than 6 weeks of supply, a tight supply condition by historical standards (see chart above).
Section II — Continued Pressures on Global Corn Supply
Corn production is a function of acres planted and crop yield per acre, which are influenced by prevailing market prices, input costs such as fertilizer, and weather. In the following sections, we examine three current drivers contributing to tighter supply conditions — weather, fertilizer prices, and war in Ukraine.
4. 2022 Crop Yields — Intensifying Drought Conditions Limit Yield Potentials
Following a drought-plagued 2021 on account of La Nina, adverse weather conditions were expected to moderate in Argentina and Brazil in 2022. Instead, dry weather and heat in South America persisted into January and February 2022, leading to concerns about crop yields. Of particular concern for corn is the impact on Brazil’s second-crop corn, which has yet to be harvested but accounts for about 75% of Brazil’s production.
In typical years, the world relies on other growing regions for incremental supply when there are disruptions in one region. Consequently, it is important to consider production from multiple regions as growing cycles differ across countries. As Northern Hemisphere producers, the Ukraine and the United States have a different corn planting season than South America, with both countries typically planting their crop around May with harvest 4–5 months later in the fall.
The latest weekly U.S. Drought Monitor shows intensifying drought conditions in the western half of the US, including the major corn-producing states of South Dakota, Nebraska, and Kansas. While conditions can improve as the growing season progresses, dry conditions at this point tend to limit yield potential and hence overall production from the US.
5. 2022 Acres Planted — Elevated Fertilizer Prices Compress Margins and Reduce Acres Planted
Corn is significantly more fertilizer-intensive than other crops. The USDA estimates that fertilizer costs account for roughly 35% of the operating costs per planted acre for corn and approximately 17% of total costs per acre including overhead, labor, and land costs.
The spike in fertilizer prices in the Fall of 2021 associated with the natural gas crisis in Europe started to squeeze crop margins for farmers across the globe and add to food inflation. Record-high fertilizer prices are expected to deter US farmers from planting corn, with survey data from the latest USDA Prospective Plantings report suggesting nearly 5 million fewer acres of corn will be planted in 2022 compared to 2021.
Higher fertilizer prices along with supply interruptions are also expected to impact corn yields in Brazil. In 2022, skyrocketed fertilizer prices traded even higher on the back of the invasion of Ukraine by Russia, due to Russia’s position as a major fertilizer producer and exporter (20% of global fertilizer exports).
6. 2022 Acres Planted — War in Ukraine May Halve its Corn Production
Ukraine is an important corn producer, representing 3.5% of global corn production and 14.3% of global corn exports, after the US, Argentina, and Brazil (source: USDA). But the war with Russia has displaced farmers and interrupted the flow of supplies of seed, fertilizer, and other materials to plant on time. As of the writing of this post, we are about halfway through the typical corn planting period. Recent forecasts of 2022 Ukraine corn production show a year-over-year decline of 55% compared to 2021 (source: International Grains Council), both on a drop in acres planted and a decline in yields due to planting delays and less fertilizer application. With the fighting shifting to the eastern regions, corn production areas may be less directly impacted by warfare though port access for exports remains in question.
The global corn supply started to tighten following the COVID outbreak in 2020. A persistent La Nina pattern led to two years of lower crop yields while China’s farm and stockpiling policies tightened the corn market for the rest of the world heading into 2022. Since then, elevated energy and fertilizer prices have further amplified the underlying imbalance of the global corn distribution. Until La Nina dissipates and fertilizer prices retreat, the corn market is likely to remain tight for the foreseeable future.
What are your thoughts on the global corn supply chain and recent global events? We welcome your ideas and comments on the topic.
Orinda Park Insights
Orinda Park Insight is an official publication of Orinda Park Capital, covering a wide range of topics at the intersection of global markets and individual asset lifecycles.
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