Demystifying Corn Demand, Supply, and SeasonalityCorn is a versatile crop. It is used in a variety of ways. Corn is a major source of food for humans and animals. It is also an input in industrial products, such as ethanol and plastics.
According to the FAO, in the past year, over 1.1 billion tons of corn was produced worldwide. Gross production value stood at $192 billion, second only to sugarcane (1.8B tons) by volumes and to rice production ($332B) by value.
Previously , we highlighted that a bumper US harvest is expected to send corn prices tumbling. This paper is a primer on Corn. It describes demand and supply dynamics and delves into the usage of the crop, its price behaviour and seasonality, among others.
Corn is an integral part of human diet. It is consumed both as staple food and in processed products. It is also an important animal feed source.
Corn is used in the production of ethanol fuel, plastics, adhesives, and pharmaceutical products. It is also a primary ingredient in alcoholic beverages.
SEASONALITY IN CORN PRICES
The world’s largest corn producer is the US, representing 32% of production, followed by China with 23%. In October, harvest season in the US overlaps that in China, pushing corn prices to their lowest during the year.
Based on data observed over the last 17-years, the seasonal impact of harvest in the US and Chinese on corn prices is clear.
Corn price pop through the first half of the year and then plunge through Q3 until start of Q4 when the crops in the US, China, and Brazil commence harvesting.
Based on front-month corn futures, the average prices of corn have ranged between 200 USc/bushel to 800 USc/bushel.
Over the last 17-years, with the exceptions of six years (2008, 2010, 2012, 2013, 2021 and 2022), Corn prices tend to be stable through the year underpinned by stable demand and robust steady supply.
However, external shocks such as the global financial crisis, pandemic, and the adverse weather conditions cause outsized impact leading to large price volatility.
Based on CME front month corn futures prices, the heat map below shows an upward trend in corn prices from December until May which is the period immediately after US and China harvesting seasons. This phase also represents the corn planting season.
As harvesting begins, corn prices tend to plunge from June until September before starting to recover. On average, based on the analysis into corn prices during the last 17 years, February, October, December, and April are months when corn prices turn bullish. While corn prices are most bearish during the months of June, July, and March.
As corn is a hard crop which can grow in various climatic conditions, most countries have ample domestic production to match their needs with few relying on imports. Consequently, marginal demand from importers can have an outsized impact on prices.
China is the largest importer despite huge domestic production. Other major importers include Brazil, Mexico, North Africa, European Union, Japan, South Korea, and Vietnam.
WHAT DRIVES CORN DEMAND?
Demand for corn is chiefly from animal feed followed by food and industrial use. Corn’s high protein and carbohydrate content makes it suitable animal feed for cattle, pigs, and chickens.
Unsurprisingly, the US, representing 26% of global consumption, and China, representing 25% of global consumption, are also the largest consumers of corn due to their large livestock populations. The quantity of corn used for feed has remained largely unchanged ~5 billion bushels, since the late 2000’s.
Another major demand driver is Ethanol production. Ethanol has many industrial uses, the foremost of which is gasoline blending. Ethanol complements gasoline as they are mixed to create a cleaner burning and higher performing transportation fuel. The demand for corn-ethanol mirrors gasoline demand.
This year, the IEA expects 2% higher demand for Crude Oil and its by-products. Consequently, the USDA expects ethanol production to rise by the same margin.
Corn supply used for Ethanol production rose sharply in the late 2000’s but has since plateaued around 40%. At the same time, share of corn consumption for feed declined from 60% to 40%. This was accommodated through higher corn production.
Although not as significant as feed and ethanol, demand for human consumption of corn is another major contributor. Humans consume corn directly as cereal and in its processed forms. Corn can be processed into multiple by-products including Corn Flour, Corn Starch, Corn Syrup, Corn Oil, and Dextrose. Corn is present in most foods consumed by humans in one form or another.
Corn flour like wheat flour is used for cooking and baking. Corn Starch is used as a thickening agent and binder for food and pharmaceutical production. Corn Syrup (also high-fructose corn syrup) is a cheap and effective sweetener created from corn starch used in the production of processed food as well as beverages such as Coca Cola. Dextrose is a sugar substitute used as an artificial sweetener and preservative.
CORN INVENTORIES ENSURE SUPPLY YEAR ROUND
Although corn supply is cyclical based on harvest levels, demand remains strong year-round. Corn inventories play a huge role in ensuring availability even months after the harvest.
Excess corn that is not consumed in the year is carried over to the next to ensure that a baseline supply is always available. These carryover stocks are managed carefully by the USDA using regular demand and supply estimates that it publishes in a monthly WASDE report. Changes in carryover stock mirror supply-demand trends.
The USDA generally maintains carryover stocks between 1-2 billion bushels. Last year, the US ended the year with 1.2 billion bushels of corn, sharply lower from the 1.9 billion bushels in 2020-21.
However, a bumper harvest this year signals that carryover stocks from the current harvest season and marketing year are expected to surge 56% to 2.2 billion bushels.
CORN SUPPLY, PRODUCTION, DEMAND AND PRICES IN 2023
Corn prices in 2023 have broken their seasonal trend with bumper harvest expected.
In their general seasonal trend, as seen over the past 15 years, corn prices rise during the first half of the year as supplies from the previous year’s harvest start to get depleted. Prices fall sharply following the start of harvest season.
However, corn’s price since the start of 2023 shows a divergence from this seasonal trend. Prices are sharply (-12%) lower YTD. This is due to strong planting in the US as well as weak import demand.
USDA expects a record US corn harvest of 15.3 billion bushels this year. This is expected to lead to the highest levels of carryover stock since 2016-17. China’s imports and domestic production is expected to rebound sharply but is largely expected to be compensated for by huge carryover stocks in Brazil.
Brazil is expected to be the largest corn exporter followed by the US. As such, harvests in both countries should be closely watched to identify shifts in projections. In case harvest in either country is lower than expected, it would not be able to match import demand from China which would lead to higher prices.
Overall, USDA expects 27% lower average price for corn in 2023 at USc 480/bushel. This will lead to far higher global trade and consequently higher trading volumes in Corn futures.
USDA’s WASDE REPORT IS AN IMPORANT RESOURCE FOR CORN TRADERS
As stated, the USDA’s WASDE report is a critically important resource for investors. Specifically, the May WASDE report is vital for Corn as this is the start of the planting season and estimates in this report form the basis for the next marketing year’s outlook for major crops such as Wheat, Corn, and Soybeans.
WASDE includes an outlook summary for each crop as well as statistics measuring the estimated demand, supply, exports, and carryover stocks for major countries as well as different regions within the US .
The 2023 May WASDE report showed expectations of record global corn production as well as consumption. However, consumption is expected to lag production leading to larger ending stocks compared to last year. With higher ending stocks, supply of corn is expected to remain stable year-round. This is bearish for corn prices.
Understanding the supply-demand characteristics in the WASDE report can equip investors with a long-term price outlook. Still, it is equally important to keep track of the market on an ongoing basis due to the myriad of factors affecting price as highlighted above. A summary of these is also given below.
SIX KEY TAKEAWAYS
In conclusion, the following key takeaways summarise this primer:
1. Corn is a versatile crop. It is a major source of food for humans and animals.
2. Gross production value of corn stood at $192 billion, second only to sugarcane (1.8B tons) by volumes and to rice production ($332B) by value.
3. US and China are the world's largest corn producers and consumers, representing over half of global corn production & consumption.
4. Corn prices are heavily influenced by the harvest season in US and China which overlaps between September and October.
5. Major demand sources for corn are animal feed, industrial use (especially ethanol production), and human consumption .
6. May WASDE report showed expectations of record production and consumption of corn and higher ending stocks, leading to lower prices.
MARKET DATA
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