In a 2013 column, I discussed how corn prices (and soybeans, for that matter) had completed the typical three waves higher, marking the end of one era and the beginning of another. The ethanol program that mandated the use of 5 billion bushels had been met by expanded acreage. The $7 corn in 2011 and the $8 corn in the summer of 2012 not only severely reduced Conservation Reserve Program acres but incentivized our competition to expand production.
Production Grows. During the eight years from 2005 to 2013, USDA estimates show global harvested acres of 13 major crops totaled 145 million acres. The 10-year table on this page shows the growth in corn production by five major exporters: the U.S., Argentina, Brazil, the European Union and Ukraine. For reference, 1 million metric tons is the equivalent of 40 million bushels. Data shown in the table reflect the important global players, whereas the last line titled “End Stocks” includes stocks of all countries, including huge internal stocks in China.
Cumulative production rose 5 billion bushels, from 16.2 billion bushels in 2005/06 to 21.2 billion bushels in 2015/16. The good news is exports (demand) rose from 2.9 billion bushels—the U.S. share being 85.7%—to 4 billion bushels.
Yet U.S. share dropped to 43.7% of global exports. Although global demand grew, our competition captured that extra demand. The inability of the U.S. to compete has been blamed on the strong U.S. dollar, but the dollar has only become very strong in the past 18 months.
Underestimating Demand. The ability of some research firms, including USDA, has come into question. For example, soybean demand for the 2014/15 crop year originally was estimated at 3.45 billion bushels. A crop yield of 45.2 bushels per acre ended up at 47.8 bushels per acre, but demand grew faster, ending up at 3.861 billion bushels. That is 411 million bushels greater than USDA originally expected, dropping carryout to 191 million bushels.
Fast forward to 2015/16, the crop we just harvested. USDA started with a 500 million-bushel carryout on yield of 46 bushels per acre. The question is, can we find another extra 411 million bushels of unexpected demand? It’s not likely.
A similar situation occurred in corn, where demand was underestimated by 360 million bushels from beginning estimates this past year. Carryout was well below the 2 billion to 2.2 billion bushels many touted. The beginning demand estimate for corn this year by USDA was almost 400 million bushels higher than the beginning estimate this past year, making it more difficult for a demand surprise again in 2015/16.
If there is a chance at prices well above $4 corn and $9 soybeans, it means demand is absorbing global excess, including new competition from Argentina.
Although there are headwinds, El Niño effects on weather and enough other unknowns make flexibility in marketing a must.
Corn Competition Heats Up for U.S. Grain Producers