Adequacy of Corn and Begetable Oil Supplies for Biofuels in 2012-13
The biofuels industry has had to deal with tight supplies of corn and soybean oil for several months, due to adverse weather in both the 2010 and 2011 U.S. growing seasons and in the South American growing season that began last fall and has recently ended for soybeans. Tight supplies have led to two back-to-back years of record-high marketing year prices for corn and a record strong basis across the Corn Belt during the post-harvest 2011-12 season. Old-crop corn carryover stocks this August 31are projected to be the tightest in at least 17 years when measured in weeks’ supply, as shown in Figure 1.
Soybean oil supplies have been constrained by domestic crushings that were well below a year earlier during the first one-third of the marketing year.
USDA’s first supply-demand projections for the 2012-13 marketing year were released on May 10 and show the potential for a substantial easing of tight corn supplies from this fall’s harvest season onward. However, soybean projections from the same report show a five or six month period after the U.S. harvest of potentially even tighter supplies of soybeans and soybean products than so far this season.
Record corn yield projected, but depends heavily on weather
The prospect for substantial easing of the tight corn supplies reflects a combination of nearly a four million acre increase in prospective U.S. corn plantings that was indicated by the March Planting Intensions Survey and a projected record 166 bushel per acre national average yield. The projected yield is based on this spring’s very early plantings and a yield modestly above the 1990-2007-trend yield. The projected crop, if it materializes, will almost certainly create production that moderately exceeds utilization and will produce a large increase in corn carryover stocks. The projected sharp increase in stocks in turn would be likely to result in much lower corn prices than in the last few years. An anticipated much slower increase in corn use for ethanol than in recent years or possibly no increase also would contribute to the lower prices. The end result would result in significantly lower input costs for both the ethanol industry and the livestock and poultry industries. Weather across the Midwest will be a key influence on whether these optimistic projections materialize.
The mid-point of USDA’s early and still very tentative projected 2012-13 marketing year average farm price for corn is $4.60 per bushel, a drop of 24.6% from the forecast price for the current marketing year. If attained, the $4.60 per bushel price would be about 17% above 2007-09 average prices.
Our projections of potential U.S. corn supply, utilization, and carryover stocks for the 2012-13 corn marketing year, comparisons with recent years, and the USDA May 10 projections for 2012-13 are shown in Table 1 below. Our projections show the potential supply-demand balance with three alternative yields. The low-yield scenario is based on a yield similar to last year. A 140-year analysis of U.S. corn deviations from the long-run trend based on historical U.S. corn yields suggests the probability of three consecutive years of well below trend U.S. corn yields is relatively low, but not zero. In case of a repeat of an average yield near last year, corn supplies would likely remain quite tight in the year ahead, with prices similar to the average for the current 2011-12 marketing year that ends on August 31. The medium yield is an adjustment from the 1990-2007 trend yield to reflect (1) expansion of the Corn Belt westward and southward into lower-yielding regions, (2) increased plantings on lower-quality land in the traditional Corn Belt, (3) an increase in corn plantings on fields that were on land in corn the previous year, and (4) less than ideal subsoil moisture in parts of the northwestern Corn Belt.. Agronomic research at several Midwest universities indicates yields are lower on second year corn than on corn planted after soybeans. Typical second-year corn yields are reported to be 10 to 15 percent below those for corn in the more traditional corn-soybean crop rotation.
A possibly offsetting yield influence is the very early planting progress for this year’s U.S. corn crop. From an individual farm agronomic perspective, Iowa and northern Illinois corn planted in the last week or 10 days of April tends to have higher yields than corn planted later. Early plantings also tend to cause earlier corn tasseling and pollination than normal. This year, much of the pollination may occur in late June and early July. Corn yields tend to decline more significantly when planted after mid-May. However, at the national level early plantings are not a guarantee of record yields, as indicated in Figure 2. For example, corn was planted early in 2009 but the U.S. yield was significantly below the long-run trend. In 2010, corn was planted later than normal, but the U.S. average yield set a new record high. Important weather variables affecting yields include (1) subsoil moisture going into July, when corn’s water demands in much of the Midwest tend to exceed normal rainfall, and (2) rainfall and temperatures over a wide area of the Midwest in late June and July, especially when the corn crop is pollinating, In some years, the timing of the first fall killing frosts also can be important, but it is unlikely to be a factor this year because of the early plantings.
At this writing, a large part of the central and western Corn Belt has had well below normal rains in the month of May. Central Iowa went for almost three weeks this month without rain before spotty rains came through on May 24. Normally May and June in Iowa have the greatest rainfall of the year and help to recharge soil moisture for the summer. In July, Iowa corn typically needs more moisture than can be supplied by normal rainfall, so the crop needs to rely on subsoil moisture reserves. The lack of recent rains probably has not yet seriously curtailed corn yield prospects, and may have helped roots of early-planted corn to go deeper than normal. However, rainfall will become more important in the weeks ahead. Continued below normal rainfall from central Illinois westward, especially if combined with above normal temperatures, could bring some reduction in corn yields. Hot, dry weather in the Corn Belt as well as wheat areas in the central and southern Great Plains and concern about possible reduced wheat yields have brought increased price volatility, especially in the wheat markets. Volatility also has been related to a worsening European debt situation and concern about dry weather in parts of the former Soviet Union.
Potential Corn Supply-Demand Balance
With our medium yield projection (160 bushels per acre) ample U.S. corn supplies would be expected, with a moderate increase in carryover stocks to levels not seen for several years. Prices would likely be substantially below those of the current marketing year.
Our utilization projections differ slightly from USDA’s for both the 2011-12 and 2012-13 marketing years. For 2011-12, the differences are minor and reflect (1) uncertainty about quarterly corn feed and residual use based of unexplained variations of the last two years, (2) weekly corn processing for ethanol and DGS that continues to run slightly above the level needed to reach USDA’s 5.0 billion bushels of corn for ethanol, and (3) potential further increases in China’s old-crop corn purchases. Our projections show a slightly smaller August 31, 2012 U.S. corn carryover than indicated by USDA. Uncertainties of summer quarter corn feed and residual use include the potential for substantial wheat feeding and a large expected increase in early-harvested corn in the South and southern Corn Belt than last year that likely will be used before the end of the old-crop marketing year. How much early harvested corn is available will depend on summer weather in those areas. How much wheat is fed will depend on the final size of the U.S. wheat crop. At this writing, wheat prices have risen sharply in response to hot-dry weather that has stressed portions of the U.S. wheat crop in the central and southern Great Plains and some anticipated loss of production potential in former Soviet republics (FSU) due to recent dry weather. Trade analysts indicate that wheat price strength has been amplified by short-covering of speculative traders, who have been buying back previous short-sale positions. At this writing, weather forecasts call for moisture to move into parts of the FSU dry areas and parts of the U.S. Wheat Belt.
For 2012-13, our largest divergence from USDA’s projections is in the feed and residual category. USDA projects this category of utilization (or disappearance) to increase from 4.55 billion bushels this marketing year to 5.45 billion bushels next season. That’s an increase of 900 million bushels or 19.8% from 2011-12. The residual part of this is a statistical error and handling loss component and is difficult to predict. It may vary some with the size of the crop. Livestock and poultry numbers imply that the feed component of this category should not change much except for changes in the amount of wheat being fed and the potential for more forage to be available than last year. Distillers grain replacement of corn in domestic livestock feeding should not change much next season, since USDA expects corn processing at ethanol plants to remain unchanged from this season. Wheat feeding may decline in the year ahead with lower corn prices and more ample corn supplies, but total U.S. wheat feeding in the current marketing year is estimated at only 180 million bushels. Even in the unlikely event of wheat feeding dropping to zero, that would fall far short of accounting for such a large increase in the corn feed and residual category. Differences in feed and residual use projections are the major reason our high-yield scenario shows August 31, 2013 U.S. corn carryover stocks at 2.28 billion bushels vs. USDA’s 1.18 billion bushels. We project a 7.7% increase from the current season in feed and residual use and a 1.4% increase from 2010-12. A 400 million bushel larger corn carryover than indicated by USDA would be likely to significantly reduce volatility of corn prices in the year ahead, thus somewhat easing the feedstock risk-management challenges of ethanol producers and livestock feeders.
Soybeans and availability of soybean oil for biodiesel
Table 2 shows our projections of prospective soybean supplies and utilization for 2012-13 and comparisons with the recent marketing years, along with USDA’s early and very tentative projections for 2012-13. Our 2011-12 crush and export projections are 15 million bushels above those of USDA along with 5 bushels higher feed and residual use. The crushings and exports reflect current much better crushing margins than a year ago and the extremely large drop in South America’s recently harvested soybean crop. Our 2012-13 high-yield column has a yield of 44 bushels per acre, the same as in 2009 but marginally above USDA’s 43.9 bushels per acre. Our high-yield column utilization and carryover numbers are very similar to USDA’s. Both show a very tight supply picture. Supplies get even tighter if yields would be in our medium or low yield columns. A glance at other recent years shows that these yields have not been uncommon. This year’s soybean crop was planted earlier than normal, which may help yields some, depending on the weather. However, August weather is probably the most critical determinant off the U.S. average soybean yield. With yields in or near our low or medium yield columns, soybean supplies tighten further and would imply higher and more volatile prices for soybeans and soybean products.
USDA no longer projects soybean oil use for biodiesel because of a lack of available data. The tentative EPA proposed mandate for biodiesel blending with diesel fuel in 2013 is 1.28 billion gallons, a 280 million gallon increase from current mandates. The increase is expected to be used to help meet the advanced biofuel mandate. For that purpose, each actual biodiesel gallon counts as 1.5 gallons for the mandate. Using that relationship and assuming half off the increase is supplied by soybean oil, about 750 million additional pounds of soybean oil would be needed for biodiesel in 2013. The 2012-13 marketing year will include only 2/3 of the calendar year. Accordingly, perhaps 450 to 500 additional pounds of soybean oil would be needed for the upcoming marketing year if the final EPA mandate is the same as the proposed mandate. Part of the increased need for biodiesel will likely be supplied by corn oil from ethanol plants. Also, since the mandates are for a calendar year, if soybean oil prices are too high in the 2012-13 marketing year, the fuel industry might delay part of the increased biodiesel blending to the last four months of 2013 in anticipation of increased soybean acreage and possible lower soy oil and biodiesel costs. Those are considerations in our very tentative projected 200 million pound increase in soy oil use for biodiesel in the medium yield column. Even with tight soybean supplies, enough soybean oil would be anticipated to be available to fill the mandate-driven biodiesel demand.
However, the picture may be a bit different for livestock and poultry producers as they purchase soybean meal. Current indicators point to continued very tight supplies and historically high prices for soybean meal through early 2013. Supply tightness may ease some in the first several weeks after harvest, but the estimated 750 million bushel decline in non-U.S. soybean production (due largely to the severe South American drought) is likely to keep supplies quite tight until the 2013 South American harvest in February and March of next year.
Possible developments that could change these prospects
Because of this spring’s unusually warm weather, the nation’s wheat harvest is running two to two and one-half weeks earlier than usual. With new-crop harvest prices close to $12 per bushel, wheat farmers will be strongly tempted to double-crop as much wheat acreage with soybeans as possible. The main possible constraint on double-cropping will be available soil moisture, which is low in many areas at this time.
Important June 11 and June 29 USDA Reports
USDA’s June 11 WASDE report will provide updated supply-demand prospects for the current marketing year and for 2012-13, as well as updates on foreign production. A number of private organizations and some South American government agencies estimate that the South American soybean crop is below USDA May estimates. Little or no change is expected in South American corn production estimates. The June 29 reports will include June 1 grain and soybean stocks, as well as the planted acreage estimates. Grain stocks will provide an updated indication of corn, wheat, and other grains used for feed in the March-May quarter, as well as soybean residual disappearance.