The US Grain Council says it ahs received information that points to Chinese demand for around 9m tonnes of corn imports in 2011. They claim that China is expecting to be around 10-15m tonnes short on corn inventory this year (using a 30% inventory/use as a target ratio).
Now the council is an industry body, and as such its findings might be somewhat optimistic. Nonetheless, directionally, and in terms of magnitude, demand anywhere near these levels would be nothing short of dramatic. Let’s put it in a little context….
- Firstly, 2010 was a record year for Chinese corn imports at 1.3m tonnes since its 1995-6 season of crop failures. That puts the Grain Council’s estimate for 2011 7 times the recent record.
- Secondly, in 2010 the global export market was around 92m tonnes. 9m is almost a 10% increase!
- Thirdly, this 9m tonne figure is 9 times the USDA’s forecast of only 1m tonnes.
- Finally, prior to 1995 China accounted for 0% of global soybean import demand. By 2010 it accounted for 63%. Perhaps corn is about to reach an inflection point.
There are ways to profit out of this. As we’ve discussed here before, demand for soft commodities has a positive impact along the entire value chain, especially when it comes to fertilizers. We all know that with growing food demand against a backdrop of limited arable land, there’s a need to improve yields to keep the world fed. That’s great for fertilizers.
At present farmer economics are the best they’ve ever been, and 2011 looks set to be a record year. Unlike the commodity bubble in 2008 though, fertilizer producers have been more sensible when it comes to pricing their goods this time around. Potash, for example, is in around US$450/t, while at this stage of the 2008 cycle is was about US$750/t. I believe that massive price increases in the last cycle pushed farmers to reduce their fertilizer inputs dramatically (as well as the global credit crunch!). Despite what analysts were being fed by the fertilizer industry about the integral nature of their products to global food security, we all learned that farmers can take “fertilizer holidays” with negligible reductions in their yields.
This time around though, I consider the more tempered price increases as a positive for the bottom lines of fertilizer producers. After all, the top line is comprised of both volume and price, and producers are more sensibly protecting their profits, by understanding the elasticity of their products.
I recently went to visit the CEO of a major global fertilizer company who said that this time they were not being greedy!
The upshot is, that in 1Q11 I believe fertilizer stocks (and general agchem) still have some way to go, but perhaps more importantly, their downsides are more protected.