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'Oversold' corn futures to maintain gentle recovery - long-term


Corn futures, “oversold” amid the market maelstrom stemming from Covid-19, are poised to “outperform other commodities”, Fitch Solutions said, foreseeing supplies of the grain tightening out to 2024.


The analysis group - noting “unprecedented financial market stress” stemming from the coronavirus outbreak - cut by $0.18 a bushel to $3.75 a bushel its forecast for average Chicago corn prices this year, as measured by on a second contract basis – currently the July lot.


However, that remains comfortably above the futures curve, which does not see those kind of price levels being reached until near the end of 2020, on a second lot basis.


Besides noting that prices of grains as a whole have proved “relatively sheltered from the direct economic of crisis, Fitch forecast that corn futures would “continue outperforming other commodities.


“Fundamentals are more positive, and process will rebound from current oversold conditions.”


Ethanol vs meat

The bank acknowledged the weakened prospects for corn demand by US ethanol plants, after the particular plunge in energy prices amid the Covid-19 crisis.


“Ethanol margins will be poor in the wake of falling oil prices,” a decline which will “likely result in more refinery exemptions [from US blending mandates], and thus reduced demand for corn”.


However, overall US corn demand will increase nonetheless, driving world consumption “modestly higher in 2020, by 1.6% to 1.14bn tonnes, thanks to another knock-on effect of the pandemic.


“Increased US demand will result from increased meat production, especially in beef and poultry, where meatpacker margins are spiking,” a factor “partly owing to consumer stockpiling related to the outbreak of the coronavirus.”


Furthermore, after January’s phase one trade deal, and dent to China’s pork output from the African swine fever epidemic “the US will have increased trade access to China… which will also encourage {US meat] production”.


Consumption vs production

The increase in world corn consumption, while half the rate of the previous year, will nonetheless exceed the gain in global output of the grain, expected at1.116bn tonnes, up just 3m tonnes year on year.


US output will see a “large rebound”, of 10% to 382.0m tonnes in 2020-21, “as corn prices have remained relatively stable despite external market turbulence, while falling input costs, especially fuel should improve margins and encourage plantings”.


The increase also reflects the disappointing level of last year’s harvest, depressed by a wetness plagued spring sowing season.


However, Fitch added that it was “relatively pessimistic regarding long-term production growth in China, despite our expectation that genetically modified seed regulations will eventually be liberalised.


“We are forecasting a mild production increase in the EU in 2020-21,” the group said, although adding that “the long-term outlook is clouded as new sustainability policies are introduced and the Common Agricultural Policy is renegotiated”.


‘Above the market’

Fitch forecast world corn inventories, as a proportion of consumption – forming the stocks-to-use ratio seen as a key indication of market tightness, and so price prospects – falling by 3.5 points this year to 24.9%.


And the ratio will keep on declining out to 2024, when it will reach 21.1%, thanks to output remaining close to demand in upcoming seasons.


Prices will after $3.81 a bushel next year, on a second contract basis, rising to $4.18 a bushel in 2024.


“Our forecasts beyond 2020 remain… above the prices derived by the futures curve.”

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