Shrinking Global Grain Supplies Have Little Hope Of Replenishment Until 2022

The relentless rally in grain prices is the result of shrinking global supplies that might not be replaced until late 2022 – or beyond

Supplies of three of the world’s most important grains: corn, soybeans, and wheat, are shrinking, and it will likely take at least the next two growing seasons for supplies to reach comfortable levels again. That’s the prediction the USDA and many private grain analysts have come to in recent weeks, and grain markets have taken notice.

To be sure, farmers around the world are scrambling to produce as much as they can to reap the benefits of the highest grain prices in eight years. Indeed, it looks like Brazil is in the midst of harvesting another record soybean crop, which is much needed right now. But weather around the globe literally needs to be almost perfect for at least the next two seasons in order to produce enough grains to rebuild inventories back to comfortable levels again. Here’s why:

Grains are interrelated; they are used for almost everything from food for both animals and humans, to fuels like ethanol (corn) and biodiesel (soybeans), to cooking oils (corn and soybeans) to wheat for breads and pastas. Annual combined use of all three grains grows steadily; in fact, in every calendar year since 1976, the combined usage of corn, wheat and soybeans has been either the record highest, or the second highest annual usage level in history. As the global population and economy grows, so too does the use of grains. Hence, any significant supply disruption can have an outsized impact on global grain prices, which is what happened last year when China had a crop failure.

The true extent of China’s 2020 grain production problems may never be known or recognized by official sources, but that doesn’t matter. Markets can see two things that really do matter: the price of grains in China and the amount of grains China imports. Those two inputs have created a bullish formula: Chinese grain prices, particularly corn prices, rocketed last year and remain at elevated levels, and China will import record amounts of soybeans and corn this year. The verdict is still out on Chinese wheat imports, but they are likely to be record high too – Chinese wheat imports are officially already at their second highest level in history.

Because of China’s heightened grain import levels, and because of growing grain consumption globally, global grain supplies have been drawn down. In particular, projected excess supplies of grains in the US have fallen dramatically from just last year. US soybean excess supplies are projected as of this coming autumn harvest (6 months from now) to be less than 10 days’ usage, down from over 48 days’ excess supply last autumn. That’s not a typo – US soybean excess inventories are projected by the USDA to be down 80% year-on-year from last season’s harvest to this season’s harvest. Excess US corn inventories are projected down around 33% (from about 50 days to around 33 days) in the same time period, wheat’s inventory decline is projected to be the least dramatic, with excess US wheat supplies down 18% from about 179 days last year to around 147 days this coming autumn.

Critical to all of the assumptions made by the USDA when determining their estimates are what are called “trend line yields,” that is, historical multi-year yields based upon prior actual per acre annual yields for corn, soybean and wheat crops in the US and the world. Yields are dependent on weather, and since accurately predicting long term weather trends is not yet possible, the USDA is forced to use estimates based upon historical data. Luckily, there are a good number of years when the trend line yield is achieved. If farmers achieve trend line yields this season, grains will hit the USDA’s inventory projections, and if the yields are exceeded, which does sometimes happen, grain inventories will build slightly from current projections, but it will still take a second consecutive year of trend line yields to build grain inventories to more comfortable levels.

There is an important catch in all these projections: constantly improving technologies improve crop yields over time, which means trend-line yields mathematically increase over time. That means the USDA is projecting future crop inventory levels that assume good weather, which in turn enables farmers to achieve trend line yields. If there isn’t perfect weather, trend line yields are not achieved, and if trend line levels are not achieved, then there are fewer inventories than projected.

In the current scenario where projected excess grain inventories after the harvest of a crop not yet planted are too tight for comfort – even when assuming a trend line yield – what happens when the weather doesn’t cooperate and the trend line yield isn’t met? This is the greatest fear of grain markets, and this is why markets have rallied to eight year highs in the three major grains. Perhaps global weather will be perfect for the next two seasons, and grain inventories will rebuild towards levels at which markets are more accustomed. This could alleviate and even reverse the current uptrend in grain prices, but a good deal of time will have to pass until we know with certainty, which means grain markets are likely to be volatile and uncertain for a good while longer.