November Update - Will There be Enough Corn?
AgMRC Renewable Energy & Climate Change Newsletter
Dr. Robert Wisner
University Professor Emeritus
Iowa State University
In September we looked at corn availability for the year ahead, based on the USDA September 12 crop report. Although the production forecast was well below total corn use in the marketing year ending August 31 and was lower than indicated in August, corn prices have fallen sharply since then. The price decline has been due primarily to (1) heightened concern about the European sovereign debt crisis, with fears that some countries may default on debt, placing large international banks and the world economy at risk, and (2) USDA’s September 30 U.S. corn and wheat stocks report. The stocks report showed 160 million bushels more U.S. corn in storage on September 1 than anticipated by the grain trade and less wheat feeding than expected. Thus, U.S. corn supplies will not be as tight as previously anticipated. The reported stocks suggested domestic corn feeding has already been sharply curtailed, a conclusion that looks out of line with other indicators. The October 12 USDA crop report showed an additional 64 million bushel decline in expected 2011 corn production, along with an additional 123 million bushel decline in the November 9 crop report.
|The reported stocks suggested domestic corn feeding has already been sharply curtailed, a conclusion that looks out of line with other indicators.
Analysts use quarterly grain stocks to calculate corn and wheat feeding. Feed use is not measured directly but is calculated as a statistical residual. Known uses indicated by processing and export data are subtracted from beginning supplies. Then, after subtracting ending supplies, the difference is termed “feed and residual disappearance.” The “residual” portion reflects spoilage, handling losses, and possible statistical errors.
Analysts are puzzled at the relatively low summer quarter corn feed and residual disappearance for the second consecutive year. Large livestock numbers and severe drought with lack of pasture and forage for cattle feeding in the southern Great Plains were believed to have boosted grain feeding. The lower-than-expected wheat feed and residual number would be expected to support June-August corn feeding.
In this article, we provide an updated look at corn availability for feed and other uses in the year ahead and potential reductions in use, taking into account USDA’s November 9 crop production estimates and the September 30 grain stocks report.
Summer quarter corn feeding
The amount of corn fed domestically can be influenced by a number of factors including (1) corn quality, (2) availability of other grains at competitive prices – primarily sorghum and wheat, (3) livestock and poultry marketing weights and numbers, (4) availability of forage and pasture for cattle, and (5) more recently availability of large quantities of distillers grain (DGS). Quality of the 2010 U.S. corn crop was quite good, thus tending to slightly reduce the amount of corn needed per pound of animal products produced when compared to the lower quality 2009 crop. Sorghum supplies appeared to be relatively tight, but a plentiful supply of competitively priced soft red winter wheat was expected to have replaced some corn feeding during the summer. However, wheat production and stocks data showed less wheat feeding than expected. These developments and livestock numbers indicate corn feeding should have been modestly above a year earlier. Distillers grain (DGS) supplies increased modestly from a year earlier during the summer quarter, as anticipated by the grain trade, but could not account for the difference between actual and expected stocks..
Figure 1 shows USDA estimates of quarterly corn feed and residual disappearance for the last few years and our estimates of the amount of domestic corn feeding replaced by DGS after deducting exports. We assume 23% of 2010-11 DGS production was exported. Estimated substitution of domestic DGS feeding for corn is based on corn replacement ratios that vary by livestock species. The highest replacement ratio is for beef cattle feeding, with substantially lower corn replacement ratios but higher soybean meal replacement ratios for dairy, hogs, and poultry. In Figure 1, the first vertical bar in each annual set moving from left to right represents the September-November quarter. The second represents December-February, the third March-May, and the last shorter bar is the June-August quarter. The lower part of each bar is USDA’s estimated corn feed and residual disappearance while the upper part is our estimate of corn replaced by DGS. Note the substantially lower summer quarter bars for the past two years when compared to earlier years. In the preceding three years, the average summer quarter total for corn and DGS was 940 million bushels, ranging from a low of 920 million bushels to a high of 952 million. For the last two years, summer quarter totals averaged 776 million bushels, with last year being 17 million bushels above the average and this year being 16 million bushels below it. The difference is even more pronounced when summer wheat feeding is included. June-August combined corn, DGS, and wheat feeding totaled an estimated 965 million bushels, down 22% from the 2007-2009 summer quarter average.
Wheat feeding almost always is greatest in the summer quarter and is quite light later in the year. September 1 stocks data indicate this year’s summer wheat feeding was much less than expected at 21% less than a year earlier. Soft red wheat cash prices were below corn for most of the summer and should have encouraged wheat feeding. However, some analysts believe the large carry in Chicago wheat futures from nearby contracts to spring delivery months would encourage wheat storage rather than using it for feed. Others argue that the wheat basis could be very weak in the spring, thus possibly eliminating much of the storage return reflected in the market carry.
This sharp decline in indicated summer quarter corn and wheat feeding creates much more uncertainty than usual in projecting corn feed and residual use for the year ahead. Animal numbers and other conditions suggest June-August grain feeding should have been substantially larger. Is the lower summer use a pattern that will continue in the current marketing year? Or is it a statistical problem, perhaps indicating last year’s corn crop was under-estimated by around two bushels per acre? Others have raised questions about the accuracy of the September 1 stocks estimates. Historically, analysts have considered the grain stocks data to be more accurate than production numbers. A number of analysts a year ago indicated the unusually low summer 2010 corn feed and residual use may have been due to aggressive feeding and exports of early harvested new-crop corn in southern states. This year, the volume of early-harvested corn likely was lower than a year earlier. Early harvested 2010 corn that was fed before September 1 (essentially substituting for old-crop corn) would allow old-crop stocks to be larger on September 1. The September 1 stocks report includes only old-crop corn to avoid double-counting of new-crop corn that might otherwise be reported both in the stocks and production numbers.
We take the view that last year’s corn crop may have been modestly under-estimated. If so, September 1 corn stocks provide a larger initial corn supply than previously expected, but don’t reflect sharply reduced corn feeding in the 2010-11 marketing year. Last year’s corn feed and residual disappearance is a base for projecting corn feeding in the year ahead. Our assumption, if correct, suggests corn prices need to be high enough to reduce domestic corn feeding by about 4 to 5 percent from actual 2010-11 feed and residual use after taking into account tighter supplies of other feed grains and forage than a year ago. Expected adjustments to cut corn feeding include reductions in poultry numbers, and cattle on feed in the last half of the marketing year, as well as lighter livestock marketing weights.
Corn export prospects
In the international picture, corn faces strong competition from feed wheat from former Soviet republics (FSU) that harvested much better crops than a year ago. Also, the Ukraine will be a moderate corn exporter. World wheat stocks at the end of the current marketing year are projected to be a fully adequate 15.6 weeks’ supply. Ending stocks are projected to be 6.47 million tons higher than a year earlier, with China and FSU stocks up 8.77 million tons. In other words, China and FSU account for essentially all of the projected increase in global wheat stocks. Forty six percent of global stocks are projected to be held by China and FSU, where the accuracy of stocks is questionable.
Global corn stocks are projected to decline by 10% or 590 million bushels, to a tight 8 weeks’ supply. Forty one percent of these stocks are projected to be held by China. China will want to continue holding large stocks as a reserve against possible weather-induced short crops. Also note that accuracy of Chinese corn stocks is questionable.
Official USDA and Chinese government projections indicate China had a record 2011 corn crop and has adequate corn supplies. However reports from Chinese grain trade sources and the U.S. Grains Council continue to indicate China is likely to be a significant corn importer this season. At this writing, USDA reports their total 2011-crop purchases of U.S. corn at 88 million bushels, 616% above a year earlier.
The largest source of competition for U.S. corn is South America. Projections in USDA’s November 9 World Crop Supply-Demand report show moderately increased corn production for that region next spring, assuming normal weather. However, as a caution in South American crop prospects, weather specialists indicate a La NiÅˆa weather pattern is present and could possibly intensify in the months ahead. Note from Figure 2 that Argentine and Brazilian corn production were reduced significantly by a La NiÅˆa drought in 2008-09. A repeat of 2008-09 weather in the South American growing season could increase export demand for U.S. corn in the last 2/3 of the current marketing year. China also is reported to have an agreement to import two to three million tons of Argentine corn (80-120 million bushels) that normally would be shipped to other countries.
Based on estimated and projected foreign crops, we expect U.S. corn exports for the current marketing year to be 9 to 11% lower than last season but slightly higher than the latest USDA projection. U.S. corn export sales to date are up 1.2% from a year earlier. Eleven weeks into the new marketing year, an unusually high 53% of USDA’s projected marketing year total exports is already sold. Crop prospects in South America and Chinese purchasing activity should be carefully monitored in the next three months for updated indications of export demand. Larger exports than currently projected would necessitate a further reduction in domestic corn feeding.
U.S. corn production
This year’s combination of weather events has taken a serious toll on U.S. grain and oilseed crops. That picture was reinforced by USDA’s National Agriculture Statistics Service in its November 9 crop production estimates . The U.S. average corn yield at 146.7 bushels per acre was down 1.4 bushels per acre from the October forecast. The average yield is estimated to be down from a disappointing 152.8 bushels last year, 153 bushels per acre in the August forecast, and a 1990-2008 trend yield of about 162 bushels per acre. Total production is forecast at 12.31 billion bushels. This estimate indicates production will be about 744 million bushels or 5.7% below reported corn utilization in the year ended August 31, 2011 The production estimate is still somewhat tentative and will be updated in the early January season-final crop report. At this writing, a considerable amount of corn remains to be harvested in Michigan, Ohio, Indiana, and Pennsylvania because of continued rains. That region produces about 1.7 billion bushels of corn.
About half of the adjustment to the smaller crop can be made by reducing corn carryover stocks, although that will eliminate any reserve supply to offset possible weather-reduced production next year. That leaves about 350 to 375 million bushels of cuts needed in corn use from last season. Important questions facing corn users are (1) which users will cut back in response to inadequate supplies, (2) what prices will be required to generate the required cuts in use, and (3) what adjustments will be needed to bring the reductions in use.
More changes ahead in crop estimates?
History indicates and January season-final USDA crop report could show an additional yield change, although any change is expected to be small.
Figure 3 provides additional insight into crop report changes from November to the season final estimates in years when the U.S. corn yield estimate declined from September to November. The average corn yield change from November to the season final estimate in these years was -0.73%. With no change in harvested acreage, that percentage yield change would cut an additional 90 million bushels from this year’s production, with all of the decrease having to be adjusted for through a further reduction in corn use. Most analysts do not expect a decrease of that amount, but no further change in the final corn crop estimate.
Will corn use for ethanol be reduced?
As indicated above, we expect corn feeding and exports to decline modestly this marketing year. Our projections place exports at 185 million bushels less than last season and domestic feed and residual use down about 42 million bushels from USDA reported 2010-11 feed and residual use (although we anticipate the cut from total use of all feed grains will be more like 160 to 200 million bushels). These two uses of corn are the third and second largest sources of demand, respectively. The largest source of demand is corn food and industrial use, which is strongly influenced by government ethanol blending mandates.
Figure 4 shows the relative sizes of these three corn use categories in the 2010-11 marketing year ended August 31. The composition of demand for corn has changed dramatically in the last seven years, with rapid growth of corn processing for ethanol and DGS. Food, industrial, and seed use has expanded to almost ½ of the total demand for U.S. corn. A key question in corn-user adjustments to this year’s reduced supplies is whether corn use for ethanol will be reduced. USDA October 12, 2011 projections show only a 20 million bushel reduction from last season in that use category. If so, livestock feeding and/or exports will need to be reduced more than we are projecting.
The ethanol-DGS portion of the demand is strongly influenced by (1) the price of gasoline, (2) government ethanol blending volume mandates from 2007 energy legislation, (3) the ethanol blenders’ tax credit, and (4) the price differential between gasoline and ethanol. Recent political developments and federal budget pressures strongly suggest that the 45 cents per gallon ethanol blenders’ tax credit will not be renewed when it expires at the end of this year. Thus, one major incentive for blending ethanol with gasoline will likely disappear. However, the mandates are expected to remain in effect. When corn supplies are extremely tight, the mandates create a perfectly price-inelastic demand for corn used by ethanol plants -- at certain minimum volumes, In other words, the amount of corn used for ethanol becomes insensitive to corn prices. At plentiful corn supplies and lower prices, the ethanol industry tends to produce ethanol above mandated levels if infrastructure permits it. If corn supplies become tight, the motor fuel industry is required to blend the mandated volumes of ethanol into gasoline, paying whatever price is needed to obtain the ethanol. This, in turn, would allow ethanol processors to pay whatever price is needed to obtain the required volume of corn for mandated ethanol blending.
The ethanol industry has been producing above mandated levels in the last few years. Excess production generates excess RINs, the renewable information numbers for each gallon of biofuel produced . These excess RINs can be substituted for actual ethanol blending with gasoline, provided their useable life hasn’t expired and provided they haven’t been used for ethanol exports. Ethanol exports don’t count toward the mandates but do require RINs. Ethanol export demand has been increasing in the past two years. In corn-equivalent terms, the ethanol from about 310 million bushels of corn appears to have been exported in the marketing year ended August 31. For further detail on potential ethanol industry adjustments to a changing policy situation, see our article, “Arriving at the Ethanol Blend Wall: Will 2011-12 Corn Use for Ethanol Reach Current Projections” in this newsletter.
Factors affecting blending economics
Without a blenders’ tax credit, the economics of blending more ethanol than mandated will depend partly on the premium of gasoline prices over ethanol. Premiums reflected by nearby and distant futures markets on November 8 are shown in Figure 5. The ethanol discount to gasoline is small or non-existent in the nearby futures months but increases gradually in distant futures to 30 to 40 cents per gallon in some months. This relationship is not a forecast, but is an approximate pricing opportunity for blenders, although it should be cautioned that the distant contracts are thinly traded. Large-volume trading might alter the relationship. Basis relationships will be another factor influencing blenders’ decisions. Incentives for blending ethanol with gasoline vary over time and may also be influenced by potential reductions in costs of the enhancing gasoline octane content with ethanol blending. At times, the fuel industry may have incentives for blending more ethanol than required by EISA mandates, even without the blenders’ tax credit.
Conclusions: where will corn use be reduced by tight supplies?
Corn processing for ethanol and DGS could possibly be reduced in this marketing year by 25 to 75 million bushels from 2010-11. However, that number should be viewed as very tentative. Whether a reduction materializes will depend on ethanol export demand, the price spread between gasoline and ethanol, the cost of corn, and the amount of unused RINs that can be substituted for blending. Recent margins for processing corn into ethanol and DGS in efficient plants have been well above shut-down levels, based on data from the USDA’s Agricultural Marketing Service and variable ethanol production costs from the AgMRC ethanol model. These returns and ethanol blending mandates suggest lower ethanol prices and/or higher corn prices probably would be needed if corn use for ethanol and DGS is to be reduced moderately from the current USDA projection of 5.0 billion bushels.
Most of the required reduction in corn use appears likely to occur in livestock feeding and exports. Our updated corn balance sheet contains detail on projected supplies, utilization, and prices and is available at: http://www.extension.iastate.edu/agdm/crops/outlook/cornbalancesheet.pdf.
Season average prices for 2010-11 as well as for 2011-12 reflect a weighted average of farmer cash-market sales and forward contracted grain. Early forward contract sales of 2010-crop corn kept the weighted average price below the cash-market average. For 2011-12, early forward-contracted sales may raise the weighted average price above the cash market average.
The corn, soybean, and soybean meal markets will likely remain quite volatile this fall, winter, and next spring as grain users and other market participants adjust to updated supply and demand information, South American crop prospects and a likely battle between corn, wheat and soybeans for more U.S. acres this winter and next spring. October-December volatility, however, appears likely to be less than in the past 5 months. Concern about the European sovereign debt crisis and potential negative impacts of the global economy may slightly temper price volatility or skew it to the down-side in price movements.
|Early indications point to a potential need for a combined 4 or 5million more U.S. planted acres of corn and soybeans next spring, alongwith some increase in planted wheat acres.
The harvest-time basis (cash-futures price spread) for corn has been extremely strong, with eastern and western Corn Belt cash prices much closer to December futures than would normally be expected. The strong basis reflects limited old-crop supplies, limited farmer new-crop marketings, and steady purchases of corn. Increased farmer marketing for cash-flow needs and slowing user purchases may bring a steady to slightly weaker corn basis at times during the early winter, barring weather problems in South America. Mid-February through late April old and new-crop prices will likely again reflect South American crop prospects and the battle among U.S. corn, soybeans, and other crops for 2112 planted acreage. Early indications point to a potential need for a combined 4 or 5 million more U.S. planted acres of corn and soybeans next spring, along with some increase in planted wheat acres.
Data on grain production and stocks used in this report are from NASS, USDA and WAOB, USDA. Ethanol and DGS data are based on EPA, EIA, and USDA, ERS. Grain, gasoline, & ethanol price data are from AMS, USDA and CME
1 World Agricultural Outlook Board, World Agricultural Supply-Demand Estimates, WASDE-499, November 9, 2011.
3 NASS, USDA, Crop Production, November 9, 2011, Washington, D.C.
4 Energy Independence and Security Act of 2007 (EISA), U.S. Congress.
5 For an explanation of RINs, see Wisner, “Renewable Information Numbers (RINs) and government biofuels blending mandates,” Renewable Energy Newsletter, Ag Marketing Resource Center, April 2009.
6 Wisner, “Ethanol exports: what’s the trend and where are they being shipped,” Renewable Energy Newsletter, Ag Marketing Resource Center, March 2011
7 AMS, USDA, Iowa ethanol and co-products processing values and AgMRC ethanol model
8 AgMRC ethanol profitability and information files