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Corn Supply Slumps Most Since ’75 on Ethanol Profit

March 27, 2013
corn pile
  

March 27 (Bloomberg) -- Corn supplies in the U.S., the biggest grower, are shrinking at the fastest pace in almost four decades as improving demand from ethanol refiners drains reserves already diminished by drought.

Stockpiles probably fell 38 percent in three months to 4.995 billion bushels (126.9 million metric tons) by March 1, the biggest drop since 1975, according to the average of 31 analyst estimates compiled by Bloomberg. AgResource Co. in Chicago and Northstar Commodity Investments Inc. in Minneapolis expect prices to jump 13 percent to $8.25 a bushel before supply rebounds with a record harvest in September.

After idling refining capacity when corn reached a record in August, ethanol plants expanded output since January as falling grain costs and rising fuel prices drove profit margins to a nine-month high. Demand from the industry, which uses two of every five bushels in the U.S., provides the "strongest upside risk" for corn, Goldman Sachs Group Inc. said March 11. That’s boosting feed costs for meat and dairy producers even as global food prices extend their longest slump since 2009.

"Corn supplies are going to be tighter than we have ever seen," said Kent Jessen, the director of merchandising for West Des Moines, Iowa-based Heartland Cooperative, which has 52 grain terminals across 17 counties. "Some people are going to run out of corn this summer. Ethanol processors are the best bid for corn, and that is drawing supplies away from exporters and livestock producers."

Output Drop

Futures on the Chicago Board of Trade have gained 4.1 percent this month to $7.325, reaching a six-week high March 21. The Standard & Poor’s GSCI Agriculture Index of eight commodities is up 1.8 percent, while the MSCI All-Country World Index of equities advanced 1.1 percent. Treasuries were little changed, a Bank of America Corp. index shows.

Last year’s U.S. drought was the worst since the 1930s, cutting U.S. corn production by 13 percent and leaving inventories on Dec. 1 at 8.03 billion bushels, the lowest post- harvest tally since 2003, government data show. Analysts expect a U.S. Department of Agriculture report tomorrow will show March 1 reserves at the lowest for that time of year since 1998.

That’s boosting prices for grain available before the Midwest harvests start in five months. Corn futures for delivery in May fetch a premium over the December contract that has surged 61 percent this year and touched a seven-month high of $1.67 a bushel March 20.

Ethanol Profit

Ethanol prices in Iowa, the biggest corn-growing state, jumped 22 percent since Jan. 4, according to the USDA. The industry cut output by as much as 16 percent from a peak in June, after corn surged to a record $8.49 on Aug. 10.

Inventories of the fuel that normally increase in the months before the summer driving season tumbled 11 percent since mid-December, Department of Energy data show. Ethanol is blended with gasoline in most of the U.S.

"The roof is going to blow off the corn market if we don’t slow production," said Mark Schultz, the chief analyst for Northstar, a cash-grain trader and broker. "Corn prices could rise to $8.30 to finally shut off demand and prevent regional shortages before the harvest."

Higher prices already reduced demand from livestock and dairy producers that consume about 42 percent of the nation’s corn. Feed use slipped to 1.524 billion bushels in the three months ended March 1, from 1.543 billion a year earlier, Dan Cekander, the director of grain market analysis at Newedge USA LLC in Chicago, said in a report to clients on March 19.

Alternative Feed

Dairy farmers in California, the biggest milk-producing state, cut back to about 5 pounds of corn a day per cow from 15 pounds after local cash prices reached $8.80, according to Joel Karlin, the commodity sales coordinator for Western Milling LLC in Goshen. They switched to cheaper alternative feeds including hay and byproducts from fruit and vegetable processing.

Some corn buyers may wait until the harvest. The USDA said in February that output will rebound to a record 14.53 billion bushels this year with normal weather. The department probably will report tomorrow that planting in April and May will rise to 97.339 million acres, the most since 1936, according to the Bloomberg survey of analysts. Corn futures for delivery in December are 22 percent cheaper than the May contract, and 35 percent of the 1,500 farmers queried by Farm Journal magazine last week said prices will peak this summer.

Commercial Depots

Stockpiles also are getting harder to predict because growers are storing more in their own silos rather than paying for space in commercial depots. On-farm storage capacity expanded 1.4 percent from a year earlier to 12.975 billion bushels in December 2012, the most since at least 1989, USDA data shows.

Over the past six years, analysts’ estimates for the March 1 inventory missed the USDA tally by an average of 123 million bushels, according to data compiled by Bloomberg. That’s enough corn to feed 15.4 million pigs, or 14 percent of the U.S. herd, until they are big enough to be sold for slaughter. For the 11 quarters since June 2010, the average intraday price swing on the day of the USDA inventory report was 5.6 percent, with prices rising six times and falling five.

While the U.S. cattle herd is shrinking, domestic hog farmers expanded their breeding herd by 0.2 percent to 5.817 million sows on Dec. 1 from a year earlier, according to a quarterly USDA tally. The number of chicks placed on feed in the week ended March 15 was up 1.2 percent from a year earlier.

Reopening Plants

Demand from the U.S. ethanol industry, which makes fuel almost exclusively with corn, shows few signs of slowing. Production jumped 1.5 percent to 809,000 barrels a day in the week ended March 15, the most in three weeks, government data show. The increase means corn will beat soybean and wheat prices in the first half of the year, Damien Courvalin, an analyst at Goldman Sachs in New York, said in a March 11 report.

Valero Energy Corp., the third-biggest U.S. ethanol producer, said March 15 it restored operations at a plant in Bloomingburg, Ohio, and restarted a mill in Linden, Indiana, on March 22. At least 19 plants had been idled since June, according to the Renewable Fuels Association in Washington.

On March 19, the estimated profit on a gallon of ethanol produced in Iowa reached 22.56 cents a gallon, the highest since June 7, according to cash prices reported by the USDA and compiled by Bloomberg.

"Ethanol production is ramping up at a time when demand needs to be slowing," said Dan Basse, the president of AgResource. "The market has not sent a strong enough signal yet to switch off ethanol production." Corn will need to reach $8.25 before refiners slow purchases, he said.

Iowa Corn

The premium paid for corn in Iowa has averaged a record 40 cents a bushel over Chicago futures this month, according to Heartland Cooperative’s Jessen. Some plants are paying as much as 70 cents more than the May and July contracts on the CBOT.

Marquis Energy, with plants in Illinois and Wisconsin that can produce more than 200 million gallons annually, has been running at full capacity since September, said Mark Marquis, the president and founder. The Hennepin, Illinois-based company has enough corn to last through the next harvest, he said.

U.S. law requires 13.8 billion gallons of ethanol to be blended this year, up from 13.2 billion in 2012. Most gasoline sold at American pumps has about 10 percent ethanol.

Credits for blending ethanol with gasoline jumped to a record $1.06 a gallon on March 8, from 7.1 cents two months earlier, boosting the incentive to produce more, according to data compiled by Bloomberg. The credits that refiners must collect to show compliance with the federal mandate are attached to each gallon of ethanol as it’s distilled or imported.

"We should have enough corn through June," said J.B. Daughenbaugh, a grain merchandiser for Gibson City, Illinois- based Alliance Grain Co., which has 40 million bushels of storage capacity at 13 locations in the state. "But July and August will be very tight."

 

--With assistance from Mario Parker and Tony C. Dreibus in Chicago. Editors: Steve Stroth, Thomas Galatola

 

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net


 

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