Supply shocks more likely to bring price spikes than demand increases
As longer days cue the advent of spring and planters are roused from winter slumber, $4 corn is driving decisions for 2014. While farmers focus on prices at the farm gate, the tide is changing across the oceans. Corn production and export competition is heating up, bearing heavy on supply, demand and prices in your back 40.
Even though corn prices are likely to be in the $4 range for the foreseeable future, production problems in the Ukraine and Brazil could spur prices to $7 in a single year and then retreat back to $3.50 to $4.50 in subsequent years, says Frayne Olson, North Dakota State University ag economist.
In light of the new global corn environment, Olson encourages producers to start thinking about marketing more than one crop at a time during price spikes. Production is less consistent in other parts of the world, he adds, so any price spikes in the next few years are more likely to be from supply shocks than demand increases.
"We’re living from crop year to crop year," Olson cautions.
Because of the increased volatility and potential shocks to the global system, Sterling Liddell, Rabobank senior vice president, food and agribusiness research, advises producers to boost working capital levels and not to become overextended on liabilities.
In spite of uncertainty, there’s good news: U.S. corn exports—after falling sharply from 2007 to 2012—are bouncing back quicker than expected. At the same time, even the most optimistic don’t anticipate a return to the halcyon days when the U.S. ruled the export seas unchallenged.
As of mid-February, USDA forecasts that U.S. corn exports will reach 1.6 billion bushels in 2013/14. Long-term projections peg corn prices at sub-$4 per bushel until 2022, with a low of $3.30 per bushel in 2015/16.
The next move. Brian Grete, editor of Pro Farmer, thinks USDA’s export figure might be a little ambitious. He estimates 2013/14 corn exports to reach 1.575 billion bushels. For 2014/15, however, he looks for a 14.3% increase to 1.8 billion bushels.
"The size of the 2014 crop will impact how much is exported, but not as much as supplies and political and economic stability in other exporting countries, such as Ukraine and Argentina," Grete says.
The 2015/16 forecast is more difficult, Grete adds. Even though he expects an additional 5% export increase, with trend-line or better yields, corn prices could be as low as $3 per bushel with two good back-to-back crops.
At that price, new demand would grow corn exports to the 2.2 billion to 2.3 billion bushel level, he says, not quite reaching the 2007/08 levels of more than 2.4 billion bushels, even with excellent crops.
The long-term trend remains "very favorable" in the view of Carl Casale, CEO of CHS Inc. The combination of future income growth and population in developing countries bodes well for U.S. exports, he notes.
"China will be importing a high percentage of its corn," Casale predicts.
Olson, who’s not so sure, is quick to mention that while China imports a high percentage of its soybean needs, it still has a stated goal of self-sufficiency in corn and other grains.
Even if China increases yields and achieves 80% to 90% self-sufficiency, importing just 15% of its corn needs for the next 15 years creates good demand for corn, Grete notes.
"It’s a distinct possibility that we could set a new corn export volume record—though probably not a value one—sometime within the next decade," says Pat Westhoff, director of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.
However, global corn supplies have been increasing faster than demand on a per capita basis. Both FAPRI’s Westhoff and Rabobank’s Liddell acknowledge that even with the surge they foresee in export volumes, corn prices are likely to remain just slightly above break-even levels, somewhere in the $4 to $5 range.
Acreage battle. A huge factor determining the future for U.S. exports and prices is how the global market responds to $4 corn. University of Illinois economist Darrel Good doesn’t look for a major cutback in global corn production; however, he does see a slowdown in increases.
"We didn’t see a retracement in the 1980s from the 1970s buildup," Good explains. "Once assets are in place, land is farmed."
Ukraine will hold onto its corn acreage, he believes, but Brazil will fluctuate between corn and soybeans.
Ukraine has increased production 350% since 2007/08, but even so, the country produces less than 10% of what U.S. farmers did in 2013. Ukraine has moved past Argentina to become the world’s No. 3 corn exporter, however.
It’s easy to see why. According to a Purdue University analysis, variable corn production costs are similar in the U.S., Brazil and Ukraine. Total production costs in Ukraine, however, are just $2.40 per bushel due to much lower land costs, says Dan Basse, president of AgResource. That’s not true in Brazil or the U.S., where land costs can account for 40% to 50% of farmers’ total production costs.
Brazil exports 28% to 30% of its corn production, compared to the 10% exported in the U.S. Five billion bushels of U.S. demand, which is used for ethanol, is highly inelastic, though, notes Dan O’Brien, ag economist at Kansas State University. Because of these two factors, Brazil will cut back corn acres at a sharper rate than the U.S.—which is already happening.
For 2013/14, South America cut back corn acreage by 4.5%, and this year, Olson looks for an 8% to 10% reduction in Brazilian corn acres.
Ukraine production will continue to increase, but at a slower rate—just 2% to 3% in 2014, Liddell predicts. Government policies there continue to stimulate production and exports.
For Brazil and Ukraine, fine-tuning corn acreage involves an infrastructure investment. "It’s not just the price for them, but logistics. It can take $1 per bushel or more to get grain to ports," CHS’ Casale adds.
So if U.S. exports rally back, why can’t corn prices roar back, too? One factor is that exports aren’t as big of a deal to U.S. corn prices as they used to be, making up only 11.5% of corn use today (or 28% counting dried distillers’ grains) compared to 40% for ethanol. The U.S. corn export market share has fallen in half—from consistently 60% to 65% prior to 2005 to 33% to 35% for 2013/14. It had to be that way. With the rapid ramp-up of corn used for ethanol and production shortfalls in the U.S., others stepped up to the plate.
The U.S. hopes to regain export market share lost to competitors, but it won’t happen overnight, Casale says. "The challenge is that we taught the rest of the world how to grow corn."
For additional perspective on crop production worldwide, visit www.FarmJournal.com/global_markets
You can email Ed Clark at email@example.com.
On the heels of a drought and tight corn stocks, the U.S. imported 121.5 million bushels of corn from 22 countries in 2013. The need for the U.S. to buy corn is expected to decline this year as production recovers. On the export side, USDA expects U.S. exports will reach 1.6 billion bushels in 2013/14, after stronger demand in the fall of 2013.
- March 2014