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Wednesday, October 05, 2011

Will There Be Enough Corn To Go Around?



 

With the short crop and volatile prices, end users are fussing with each other about their needs for corn.  And the livestock industry has raised its ire with the ethanol industry about tax credits and other benefits.  While all of that may soon be moot because of the current deficit reduction discussions, the question remains if there is enough corn to go around for feed and feedstocks to satisfy the demand.  There may still be need for more rationing.

The new crop continues to get smaller with each USDA crop report, and the October report, set for release next Wednesday (12th) will confirm whether that trend will continue.  Iowa State University economist Bob Wisner reports, “The latest crop forecast indicates production will be about 770 million bushels or 5.8% below corn utilization in the year ended August 31, 2011. Adding to uncertainty for corn users, this number is still quite tentative.”  He says at least another 500 million bushels will have to be cut from last year’s use. 

Consequently, he says there are some questions that need answers:
(1) Which users will cut back in response to inadequate supplies and high prices?
(2) What prices will be required to generate the required cuts in use?
(3) What adjustments will be needed to bring the reductions in use?

One of the nagging questions for many has been whether USDA has really accounted for acreage damaged by all of the spring and summer flooding.  Wisner says the next crop report should show such a reduction and that will clip another 74 million bushels off the total for this year.  Aggravating the issue will be the potential impact on the 2012 crop, due to flood damage that cannot be repaired, says Wisner, “In limited areas, some planting or replanting occurred after flood waters receded. In the Missouri river valley which affects parts of six states, much of the valley is still flooded. Inability to remove debris and sand deposits from fields, correct erosion problems, repair irrigation systems, storage facilities, and complete normal fall fieldwork may impact the 2012 crops in addition to this year’s production.”

Livestock feeders could rely on wheat and sorghum in times of a corn shortage, but those will not be a safety valve this year.  Wisner says wheat production is down 22% and sorghum production is down 29%.  Additionally the severe drought in the southern plains will also cast doubt on the viability of the next crop. 

Wisner says any prediction of how corn use will be reallocated in the wake of shortages must consider the dynamic changes that have been underway in the past few years; and that is the rapidly increasing demand for corn by the ethanol industry, and the slow decrease in demand by the export industry.  He says the ethanol demand is a function gas prices, the federal blending mandates, the tax credit, and the price differential between gasoline and ethanol.  But he says the tax credit may soon be cut from that list. And he adds that the other factors result in the ability of the ethanol producers to pay whatever price is needed to obtain the corn needed for ethanol refining.  Wisner also notes that ethanol producers can exceed the mandated production if export demand is present, which it is.  Europe and Brazil could buy up to 1 billion gallons of US ethanol in the coming year, which is equivalent to 360 million bushels of corn.

So what will happen in the coming year?  Wisner believes there is a potential for ethanol refining to slow somewhat and consume 150 to 200 million fewer bushels of corn.  But he says a lot will demand on the export demand.  He also expects corn exports to decline moderately, since foreign feed production is considerably higher than last year.  The primary unknown issue is Chinese demand for US corn, but close behind is the impact that global weather will have on South American crops.  Overall he looks for 185 million fewer bushels to be exported.

But the livestock demand is a complex scenario, says Wisner.  Ethanol economics will pay more than livestock feeders can pay.  Cattle on feed numbers are up because the drought shifted them from pasture to feedlot.  There are supplies of wheat available for feed, particularly soft wheat in the Eastern Cornbelt.  Poultry numbers are declining.  When all of that is reconciled, Wisner says, “It looks doubtful that corn feed demand has been rationed enough to fit the reduced supply. With only a minor reduction in corn use by ethanol plants, about 380 million bushels of reduction in corn feed and residual use would be needed. That is after adjusting for reduced availability of other U.S. feed grains that will boost potential corn demand.”

If harvest progresses, and there are no further weather threats to the slowly maturing crop in the Eastern Cornbelt or no surprises in the remaining USDA crop reports, Wisner says Western Cornbelt prices should range from $6.50 to $7.50, and Eastern Cornbelt prices 25 to 35 cents above that.

Summary:The short corn crop, combined with many dynamics in the demand for corn, casts a shadow on whether enough price rationing has occurred.  Ethanol demand, both domestic and export, will play a major role in demand.  Export demand for corn is declining, unless China has a major impact.  The livestock industry has several dynamics that are pushing and pulling on corn demand.  At the end of the day, more rationing will be needed, and corn prices are likely to average higher than where current prices have fallen.

Posted by Stu Ellis on 10/05 at 08:41 AM | Permalink

Comments

The second paragraph in this article was clearly written by someone with zero knowledge of corn production. There are several statements that clearly make no sense to people in the know, i.e. production at 770 million bushels, 500 million bushel reduction in "use" from last year. How that is bullish I do not know. Makes the rest of the article pointless to read. The market did its job. Price rationed demand. Highs are in, get ready for a mediocre market at best. Barring huge imports from China and average yields in 2012 we'll have somewhat comfortable stockpiles. Rich: Your points are appreciated. I believe Wisner is saying that more would have to be cut from use, unless more corn is found. USDA has found more, and may find more yet. We will have to wait for Oct. 12, and then again on Nov. 9. Stay tuned. ~Stu

Posted by: Rich Jaehning at October 7, 2011 4:04PM

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