If USDA's August projections of 12.87 bil. bu. corn usage are reality, it will prove this year's softer prices bought back lost demand during last year's run up.
Some analysts question feed usage with all the red ink that has been spilled; others point out it could be tougher than usual to estimate exports given the world economic crisis, an erratic dollar and concerns about U.S. government printing presses running overtime. Here's a quick look at traditional demand factors and possible impacts of these outside drivers.
Things are looking up for ethanol. Production increased this spring and summer and reached a new record monthly high in May, according to Department of Energy reports. The spread between gasoline prices and ethanol prices has widened, boosting blending return, while mandated ethanol use will rise to 14% of total gasoline supply in 2010.
USDA projects 2009–10 corn/feed residual at 5.3 billion bushels, marginally above the 2008 crop total. Although the livestock sector—especially dairy and hogs—has been hammered by lower prices received and higher feed prices in 2008, USDA shows overall grain-consuming animal units (GCAU) down just 2% and high-protein consuming animal units down 1% from last year.
USDA's August domestic soybean meal use estimate is up slightly from last year based on higher pork and broiler production. "This looks [overly] optimistic on meat production as well as soymeal use,” says Brad Anderson of Informa Economics. His reasoning: "Canola meal imports from Canada are likely to rise due to new crushing plants, and more distillers' grains are available from ethanol plants.”
Despite the global downturn in economic activity, USDA has bumped its corn export projections to 2.1 billion bushels, 13.5% higher than 2008. It predicts reduced foreign production prospects and stronger-than-expected demand from Mexico and Taiwan.
Soybean exports are unchanged from last year, despite more ample supplies and China's recent voracious appetite for U.S. beans.
However, keep in mind that exports is the category that typically shows the biggest change from summer estimates to final outcomes in the USDA report. There is an average of 15.5% difference for corn exports and 11% for soybeans between the August report and the final ending stocks report, versus a 7% difference in production for corn and 6% for soybeans. Domestic use differences are just 4% for corn and 5% for soybeans.
This year, many experts worry about whether the slowdown in world economic growth eventually could dampen commodity trade—especially for China, our largest soybean importer and a major holder of U.S. debt instruments.
"The irrational spending and increase in national debt and the effects thereof trump any reasonable planning by ag operators,” wrote one respondent to Top Producer's reader survey on risk management in August (see "Moneywise”
). "The unknowns that will result and timing of future operations—whether they are buying supplies, marketing crops, or securing loans—will be difficult. World markets, inflation and dollar-value changes will make planning difficult. All the normal paradigms are changing.”
CURRENCY AFFECTS FARM INCOME
A weaker dollar will help U.S. exports—assuming the worldwide economic slowdown doesn't dampen foreign incomes and food demand. In midsummer, on a dollar-weighted basis, spot corn was priced at $2.47 and wheat at $4.06—very attractive to foreign buyers, points out Dan Basse of AgResource.
At the same time, the Brazilian real had rallied 24% from its low. "This means Brazilian corn is priced at $1.78/bu. at the farm gate for new crop when transportation costs are subtracted,” Basse says. "That has to have Brazilian farmers cutting back rather than expanding based on the strength of the real.”
The value of the dollar is the main uncertainty in the long run, says USDA Economist Matthew Shane. "With a weaker dollar, net farm income will increase by 19% to $106 billion in 2013 and $118 billion in 2017,” he pro-jects (see chart). "With a stronger dollar, net farm income will drop by almost 7% to $83 billion and exports will drop by 27%, to $85 billion, by 2013.” When the dollar is low, interest rates typically are higher and foreign inputs such as fertilizer are more expensive, he explains.
Top Producer, September 2009