Answering the Call

February 28, 2012 09:00 PM

World production responds to need for more grain and oilseeds, sending prices upward

The past decade has been one for the record books. Emerging market economies have been on a streak, while developed economies have stagnated, sending commodity prices on a gut-wrenching roller coaster ride.

"The world is demanding more grain and oilseeds," says Jerry Norton, an economist on USDA’s World Agricultural Outlook Board and chair of the Wheat and Feed Grains Interagency Commodity Estimates committees. "Prices have risen to reflect that need, and producers have reaped returns that encourage more production." In other words, world producers responded to the record-high prices of 2007/08 and 2010/11.

Record Corn Production. Looking at the corn market first, Norton notes that 2011/12 was the fifth consecutive year of record-high corn production worldwide. "Moving from $2.50 to $5 corn has had a significant impact on world corn production," he says. In the 2007/08 marketing year, producers around the world harvested 398.3 million acres of corn. Four years later, they harvested 417.1 million acres. The increase equates to 18.8 million acres, more than Indiana and Illinois producers combined planted to corn this past year.

Much of the expansion has been in the U.S.—the world’s largest producer and exporter of corn. There have also been substantial increases in China, Brazil, the Black Sea region and the European Union. "We have seen a very strong response to world prices," Norton says.

Without back-to-back production issues in the U.S. in 2010/11 and 2011/12, world corn prices would be lower than they are today, and with recovery to trend yields in the U.S., world corn prices will decline. "Global prices for all grain and oilseeds are being supported by the tight corn supply in the U.S.," Norton says.

Rich Feltes, vice president of research for R.J. O’Brien & Associates in Chicago, Ill., notes that commodity funds have not been as active in the corn market this year as in the past. "Food inflation has been ratcheting down, and end users are a little more relaxed," he notes. "Fund managers understand this."

Higher corn prices have enticed farmers to invest in technology and tech companies to invest in research, which has encouraged the world’s producers to respond to increasing demand for food, Feltes adds.

Exchange Rate Buffer. The nearby soybean futures contract hit an all-time high of $16.50 per bushel in July 2008. Since then, prices dipped to $9.50 and climbed back to $14.40 in early 2011. Those prices signaled to producers worldwide that they should plant more soybeans.

Expansion in Brazil would likely have been even greater during the past five years had the country’s currency not been so strong, says Keith Menzie, an economist on USDA’s World Agricultural Outlook Board and chair of the Oilseeds Inter-agency Commodity Estimates committee. In 2007/08, Brazil planted 52.6 million acres of soybeans. In 2011, it planted 61.8 million, a 17% increase. Argentina also increased plantings, from 40.5 million acres to 46.2 million, a 14% increase. "Brazil is usually in a growth mode," Menzie says. "If the price is right, Brazil can expand planted area."

The U.S., by contrast, has basically held acreage flat as U.S. producers rapidly expanded corn acres. Ten years ago, U.S. producers planted 74 million acres to soybeans, compared with 2011’s 75 million acres.

Even so, with 83.2 million metric tons of soybean production in 2011/12, the U.S. is the world’s largest producer of soybeans and the second largest exporter behind Brazil. "China is the largest importer of soybeans, so even marginal changes in its crop can make a big difference in its import volumes," Menzie says.

India, too, is becoming a bigger player as it sends an increasing volume of soybean meal to its Southeast Asian neighbors. "Vietnam is a growing poultry producer, so a lot of meal and soybeans are being imported into that country," Menzie says.

Soybean oil prices have also been historically high—about 50¢ per pound of oil. "Over the past five to seven years, oil has been growing in importance and has risen from about 35% to 45% of the share of the soybean value," Menzie notes. Food-grade soybeans account for only about 1% of world production.

Without recent production problems in the U.S. and South America, world stocks, which are ample, would be much higher, Feltes says.

Volatile Wheat Market. Global wheat production in 2011/12 hit a record 693 million metric tons.
In the five years prior to the recent run-up in wheat prices and production, world wheat production was close to 600 million metric tons.

In 2008/09, following prices that hit $20 per bushel for hard red winter wheat, world output soared to 683 million metric tons, rose to 685 million metric tons in 2009/10, but then fell to 652 million metric tons in 2010/11 due to drought in the Black Sea region and Australia.

Planted area has also increased worldwide, from 538.9 million acres in 2007/08 to 550 million acres in 2011/12, a 2% increase. "The big expansions have been in the former Soviet Union states, primarily Russia, but also Ukraine and Kazakhstan," Norton says. "There has also been expansion in Europe, where land idled for conservation has come back into production."

Mike Krueger, president of the Money Farm, a grain marketing service near Fargo, N.D., says concerns have already surfaced over the world’s current wheat crops in the former Soviet Union countries; Europe; the northern Corn Belt of the U.S., where lack of snow cover and freezing temperatures might have caused winterkill damage; and the U.S. Southern Plains, where drought persists.

"Wheat prices have to stay low because we need the world to continue feeding wheat, given the tight old-crop corn situation," Feltes says. "We need a bridge to the next global corn crop."
Barring weather problems and sharp drops in world prices, the trend toward global expansion of corn, soybeans and wheat is likely to continue.


Responsive Cotton

Cotton prices hit record highs of about $2 per pound in early 2011. The high cotton prices of 2010 and 2011 sent world cotton production soaring. In 2009, the world’s cotton growers cut production to 103 million bales in response to a worldwide recession and low prices. By 2011, they had increased output to 123 million bales, according to USDA.

"There have been large responses in the Southern Hemisphere, mainly Australia and Brazil," says Carol Skelly, an economist on USDA’s World Agricultural Outlook Board and chair of the Cotton Interagency Commodity Estimates committee. India has also seen expansion, increasing output from 24 million bales in 2009 to 27 million bales in 2011. "Most of the increase was a response to prices, but some was the result of Bt seed adoption," Skelly says.

In 2010/11, as Australia emerged from its severe drought, it more than doubled cotton output. Australian growers will produce 5 million bales of cotton in 2011/12, up from 1.8 million in 2009/10.

Like India, Brazil is expanding cotton production rapidly. "What growers in Brazil have found is that after a few years of growing beans, the land is primed for a rotation with cotton," Skelly says. "Conditions for growing cotton in Brazil are favorable. They can follow soybeans with cotton in a soybean–cotton double crop, which vastly improves the profitability of the land and labor."

U.S. cotton growers responded to the recent high prices by greatly expanding acreage in 2011. "There was a record expansion of area but also a record drought," Skelly says. U.S. cotton growers expanded production from 12.2 million bales in 2009 to 15.7 million bales in 2011. "If 2011 growing conditions had been similar to 2009 conditions, U.S. producers would have expanded production to 19.6 million bales this past year, based on planted area, abandonment rate and yield," Skelly adds.

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