Different demand pictures for the eastern and western Corn Belts could work to pull corn supplies out of the far western Corn Belt in light of this year’s tight supply and demand situation. But it is unclear whether longer-term structural changes have been lopsided enough so that end users will have to pay more to move corn by rail from the western Corn Belt to the central and eastern Corn Belt this year.
"Because of the western Corn Belt’s comparative lack of markets, the basis is usually wider there," says Lee Gaus, president of International Futures Group in Chicago. "Illinois has three river markets, Mississippi, Illinois and Ohio, as well as processing and ethanol plants. The farther away you get from a river system, the wider the basis gets."
The central Corn Belt states of Iowa and Minnesota service the export market through the Mississippi River system, but it is the far eastern edges of these states that are typically able to supply that market.
In addition, Iowa and Minnesota have large corn demand markets through their hog finishing, egg laying and ethanol operations. Together, Minnesota and Iowa have more ethanol plants than the eastern Corn Belt states of Illinois, Indiana, Ohio, Michigan and Wisconsin combined or than the western Corn Belt states of North Dakota, South Dakota, Kansas, Nebraska and Missouri combined, according to the Renewable Fuels Association website.
USDA’s January Grain Stocks report shows that the eastern Corn Belt states had 3.42 billion bushels of corn in both on-farm and off-farm inventories as of Dec. 1, 2010, compared with 3.76 billion bushels a year earlier. The western Corn Belt, by contrast, had 9.12 billion bushels of corn held in both on-farm and off-farm inventories at the end of 2010, compared with only 8.89 billion bushels a year earlier.
As old-crop corn supplies tighten further, some analysts think end users in the eastern Corn Belt might have to bid more aggressively for corn, which could already be happening. "The eastern Corn Belt basis is very strong right now relative to where it typically is," says Frayne
Olson, agricultural economist with North Dakota State University. But it’s still too early to know whether corn will actually start flowing east.
As spring and summer approach, though, analysts will be watching to see whether western corn starts moving east. For that to happen, Gaus thinks, both corn exports and the ethanol grind will need to remain strong.
"This spring and summer, corn prices could be higher than they are today," Gaus says. "We will be going into spring and summer with extremely tight supplies." Whether China begins to import corn to replenish inventories is the wild card. "If that happens, corn will hit new all-time highs," Gaus adds. The record-high corn price was hit June 27, 2008, when the May contract rose to $8.1675.
- March 2011