UBS Global Corn Model: what to expect from Brazil and US corn prices?
We perform a systematic analysis of the key determinants of corn supply and demand and how they are linked to corn future prices. Based on our assumptions on key variables, we developed a proprietary corn price model to forecast prices for the next three harvests. Our estimates point towards US corn future prices reaching US$c674/bu on average for 2022, US$c607/bu for 2023 and US$c622/bu for 2024. We expect prices to continue to rise mainly driven by: i) tight supply levels, ii) solid demand from China and from the ethanol industry; and iii) the BRL-USD FX depreciation encouraging exports.
What differs between UBS Global Corn Model prices and CBOT Corn futures?
Corn futures are pointing to a decline; CBOT future curves are currently at their highest levels when comparing prices of the same contracts seen in February 2022, 6M, 1Y and 2Y before. On the other hand, our UBS Global Corn Model points to a potential price increase as we view risk from several fronts partially priced in, including: solid demand and uncertainty around production levels on adverse weather conditions, potential Russia-Ukraine news flow, and crop fragility due to input concerns further pushing prices upward.
Corn industry: key highlights
Corn is a major element of livestock feed worldwide and is also used to produce fuel ethanol, distillers' dried grains with solubles (DDGS), and in the food and beverage industry. The US, China and Brazil are the largest global corn producers accounting for ~65% of the total corn output, contributing to corn being the most produced grain in the world, with acreage representing about 25% of global planted area, behind only wheat. Recent increases in input costs have been among the main catalysts for rising prices for corn and other nitrogen intensive crops, challenging producers' planting decisions for the upcoming 2022/23 harvest.
Market perspectives on global corn supply and demand
Supply and demand are the main factors driving grain prices. Global corn supply is based on acreage and yield, which have recently been pressured by high input costs and adverse weather conditions. Corn demand is related to the global animal feed and ethanol markets, which are in turn mostly impacted by meat consumption, the biofuels sector, and the strength or weakness of the US dollar. Planting decisions are made considering the most profitable commodity for a given period. Corn prices are presently trending towards all-time highs, mainly on tight global supply levels and solid demand.
Trends and challenges: US and Brazil corn production and exports
For next season, the US Department of Agriculture (USDA) estimates a 7% YoY increase in US output to about 384mn tons. It expects exports to fall 12% YoY to 62mn tons in a more competitive environment, with higher corn exports from Brazil, Argentina and Ukraine, mainly destined for China in the 2021/22 harvest. The USDA expects Brazil's output to rise 32% YoY to 115mn tons, reaching a record level. It also projects exports to rise to 43mn tons, with volume doubling on a yearly basis. Both US and Brazilian producers expect prices to continue rising sharply, on tight global stocks and rising demand. Notably, the USDA projects Chinese demand to remain high—importing 7x more corn than the 10-year historical average.
