Changing Corn Patterns Bode Well for Price

July 15, 2011 03:48 AM
 

These are historic times for agriculture. USDA’s World Agricultural Supply and Demand Estimates released July 12 show two new patterns. First, China is increasingly becoming a major corn importer and corn used in ethanol has surpassed corn used as livestock feed.

USDA bumped up its projection for Chinese corn imports for the 2011-12 crop year from June’s 500,000 metric tons to 2 million metric tons. “And the trade believes that number is still too low,” says Ben Parks, risk management consultant for FCStone, Kansas City.
 
Some estimates put Chinese imports of corn up to as much as 7 million metric tons next year. “China has been buying both old-crop and new-crop corn the past couple of weeks,” says Parks. “Suddenly they have amassed a pretty good book of corn, most of it new crop. China could be a massive corn importer next year if prices allow it.”
 
Ethanol becomes biggest corn guzzler
The department also changed demand estimates for old-crop corn to reflect a significant reduction in feed use of about 150 million bushels. At the same time, it raised demand for corn used in ethanol by 50 million bushels, which put ethanol use higher than corn use for the first time ever.
 
“Ethanol has now become the number one usage for U.S. corn,” says Chad Hart, economist with Iowa State University. “In 2011, the pattern will continue. Ethanol demand will grow quicker than feed demand.”
 
The decline in old-crop feed use was the result of fewer animals and changing rations as livestock industries responded to the late spring spike in corn and other feed prices. “When corn reached $8, livestock producers looked for whatever alternative feed they could find,” says Hart. Over the next year, USDA expects feed use to increase from 5 billion bushels to 5.05 billion.
 
“The issue will be whether the ethanol industry can sustain these growth levels if it loses its subsidies,” says Parks. “It’s a big unknown.” Both the 54-cent-per-gallon import tariff and the 15-cent blenders’ credit are set to expire at the end of this year, but efforts are underway in Congress to repeal them even earlier as a way to reduce federal spending.
 
The fact that U.S. ethanol plants are now the largest market for U.S. corn will become a rallying cry for both sides of the subsidy issue, says Hart.
 
Parks notes that the numbers are somewhat deceiving because a share of the corn made into ethanol comes out of the back of a grinding plant in the form of distillers’ grains. Thus, he argues, the nation’s livestock industries still use more corn than ethanol grinders.
 
World stocks situation still tight
U.S. ending stocks for both old-crop and new-crop corn came in below trade estimates, but were higher than USDA’s earlier projections. With the U.S. accounting for 40% of the world’s corn, any jump in U.S. stocks affects world stocks as well. July’s estimate for World ending stocks for the 2011-12 corn crop was 115.7 million metric tons, up from June’s estimate of 112 million metric tons.
 
“The world corn situation continues to get a little tighter each and every year,” says Hart. Corn ending stocks have declined 20 percent from 2009-10’s 143.6 million metric tons. The stocks-to-use ratio has declined from 17.5 percent in 2009-10 to a projected 13 percent for 2011-12.
 
“The world situation is not as tight as the United States is, but it’s tighter than it has been,” says Hart. The new-crop U.S. stocks-to-use ratio at 6.5 percent is well below the world’s, and even if this year’s U.S. corn crop is a bumper one, U.S. stocks will be remain historically low into the 2012-13 crop.
 
Weather concerns persist
Wild weather patterns that have fluctuated from wet and cold to hot and dry are also causing corn analysts concern. “I’m really concerned about the weather forecast for the next several weeks,” says Hart. High temperatures and no rain are hitting during the critical pollination period.
 
“Central and western Kansas have major production problems, and the Texas panhandle is even worse,” notes Parks. “Some irrigated corn is being abandoned every day.”
 
Strong demand combined with tight stocks means this year’s corn yield will need to be good. While an average corn yield of 160 bushels per acre average would result in a carryout of 1 billion bushels, that’s not enough to allay ongoing supply and demand concerns, says Parks.
 
With crop problems or a major bump in demand, he says corn could make another run to $8/bu. At the same time, though, with an average U.S. yield closer to 164 bushels per acre, December corn could drop to $5/bu. by November.
 

 

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