AGRICULTURE
Feed Demand Resilient ... Despite Higher Prices Supply constraints have not been the
only contributing factor to the rapid decline in US stocks. Demand from the livestock sectors globally has remained robust. Despite slowing economic growth and a near doubling in feedstock costs, we still see global corn feed demand higher by 3% YoY in 10/11. In the US we expect feed and residual demand will top 5.1 bn bu in 10/11 (up 0.4% YoY and slightly higher than the USDA’s current estimate of 5.0 bn bu). Broadly speaking, hog producers and
cattle feeders have been profitable through the run-up in grain prices, owing to the nearly 20% YoY appreciation in live cattle and lean hog prices. Positive margins are encouraging an expansion in the US hog herd, with the most recent USDA data showing the US hog herd expanded 1% YoY in Q2 2011. Similarly, poor pasture condition and positive feeding margins have driven cattle on feed inventories up 5% YoY. In our view, feed demand will continue
to grow until grain prices rise to a level that curtails the incentive to expand — on our estimates, corn below $8.00/bu will not discourage expansion, all else being the same. We note that, even if these prices are reached, material demand destruction will take time to achieve, given the long duration of the cattle cycle.
China Short Corn & Soybeans With domestic stocks falling, owing
to higher demand and disappointing production in 2010/11, Chinese corn prices have risen 22% YoY. While we expect Chinese production to increase by 3% YoY in 2011/12, the Chinese government has already sought to shore-up domestic supplies; we estimate that China has already purchased nearly 3 mn MT of corn for delivery in 2011/12. The potential for China to purchase more US corn if the import arb opens (currently closed by $1.10/bu including VAT, but open by $0.10/bu excluding VAT) will likely keep a floor under US prices in the coming year. Structurally, we see China becoming an
importer of corn, as they have done with soybeans. China is on pace to import 53 mn MT of soybeans in the 10/11 MY, up 2.7 mn MT YoY and up 40 mn MT since 2000/2001.
Figure 2: Cattle on Feed Still Up Significantly YoY
9.0 9.5 10.0 10.5 11.0 11.5 12.0 12.5
2011 2010
5-yr Range
5-yr Av Jan Feb Mar Apr May Jun Jul Aug Sep Sources: USDA, Morgan Stanley Commodity Research
Figure 3: China Corn Import Arbitrage US$/bu
-3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5
Corn Import Arb (Ex-VAT)
Incentive to Import from USA
Corn Import Arb
No Incentive to Import from USA
1/5/2009 1/9/2009 1/1/2010 1/5/2010 1/9/2010 1/1/2011 1/5/2011 Sources: Bloomberg, Morgan Stanley Commodity Research Figure 4: Ethanol Production Margins Favourable
-0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6
Ethanol Prodution Margins, US$/gallon
-3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5
Oct Nov Dec
Jan 09
Jun 09
Nov 09
Apr 10
Sep 10
Feb 11
Jul 11 Sources: Bloomberg, NYMEX, CBOT, Morgan Stanley Commodity Research September 2011 47
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