Corn and Soybean Availability for Biofuels in 2010-11
AgMRC Renewable Energy & Climate Change Newsletter
Dr. Robert Wisner
University Professor Emeritus
Iowa State University
Corn use for fuel ethanol production has become the second largest source of demand for the U.S. crop, with total corn use for this purpose expected to be only about 10% less than its use for livestock and poultry feeding in the year ahead. About 35% of the expected total demand for U.S. corn is projected to be accounted for by ethanol. Similarly, use of soybean oil for biodiesel has become a sizeable source of demand for oil produced from domestic soybean crushings. With these large new sources of demand for two of the nation’s major crops, it is important for other users of these commodities as well as the biofuels industry to have a good picture of the adequacy of supplies for the year ahead. The adequacy question is especially important this year with extreme adverse weather in several important foreign grain and oilseed producing countries, and with low beginning stocks of U.S. soybeans as well as a relatively small reserve supply of corn for the start of the new marketing year. It also is heightened by the fact that U.S. government mandates require annual increases in the minimum fuel blending volume for ethanol and biodiesel that do not reflect feedstock market conditions. Any adjustment in these mandates would be expected only under extreme conditions, and would occur not through market processes but through political and administrative decisions.
In this article, we examine the potential adequacy of supplies, taking into account USDA’s third field-based forecasts of the 2010 U.S. corn and soybean crops as well as its forecasts of foreign grain production and supply-demand balances for the year ahead. Additional updates will be available from USDA in early November and January as additional data on actual harvested yields and acreage become available. The overall picture at this writing is that corn supplies will be tight and some rationing of demand likely will be needed in the year ahead. With the very small reserve supplies of corn that are expected at the end of August 2011, more corn acres almost certainly will be needed next year to meet continuing demand growth.
|Corn supplies will be tight and some rationing of demand likely will be needed in the year ahead.
A degree of uncertainty on final corn yields remains, in part because of late-summer dry weather in parts of the eastern Corn Belt and South, and extreme soil saturation for the first ¾ of the growing season in Iowa and parts of Illinois. In some fields, extreme wet conditions caused loss of nitrogen as well as stunting of corn plants over larger sections of fields than expected earlier in the season. These and other weather conditions have affected ear size and kernel size. For both corn and soybeans, slight additional adjustments in planted and harvested acreage also are possible, although it appears most of the likely adjustments were made in the October crop report.
|With the very small reserve supplies of corn that are expected at the end of August 2011, more corn acres almost certainly will be needed next year to meet continuing demand growth.
It should also be noted that some uncertainty still exists about the size of the U.S. 2010 soybean crop, due to hot weather in the eastern Corn Belt, parts of the central Great Plains, and South during the last several weeks of the growing season. Adding to that uncertainty, a sizeable number of soybean fields in Iowa and Illinois were hit by “Sudden Death Syndrome” (SDS) starting in early August. This disease was associated with extremely wet soils over a large area for much of the summer. It causes rapid death of the plant, before beans in the pods can completely fill out to normal size. Dry weather late in the season also can cause beans to be smaller than normal, thus bringing a deviation from the usual relationship between pod counts and yields per acre.
For corn, the USDA September 30 grain stocks report also creates an additional degree of uncertainty in supplies. Indicated feed and residual use in the June-August quarter (as implied by September 30 stocks) was extremely small by past standards (down 28% from a year earlier according to preliminary data). Reasons for that are not entirely clear, but USDA officials and others believe corn users made extensive use of early-harvested new-crop corn while allowing low-quality old-crop corn to remain in storage for blending after larger new-crop supplies were available. If so, we should expect to see larger than normal September-November feed and residual use of corn when the December 1 stocks data are released in early January.
Corn feed and residual use in the spring quarter showed an extremely large 36% increase from the previous year and is believed to in part reflect below-average quality of last year’s corn as well as storage shrink due to moisture loss and some corn badly deteriorating during storage. Much of the 2009 corn crop was stored at higher than normal moisture content because of an unusually cool summer and slow maturity of the crop as well as a very wet harvest season. September 30 stocks are a significant part of the corn supply that is available to use in the September 2010-August 2011 marketing year.
For soybeans, the October crop estimate indicates supplies should be fully adequate to meet food, processing and export needs as well as biodiesel demand in the year ahead. That of course is assuming South American weather is favorable for its September-April growing and harvesting seasons. South American soybean production now exceeds that of the U.S. Its planting season begins in September and extends into January. Reports from Brazil indicate weather in parts of its Soybean Belt has been unusually dry and there is some concern that La Niña weather may bring a drier than normal growing season. Rains there have been adequate in the South but more limited in its Center West Soybean Belt. Mato Grosso, the leading soybean state, is in this region.
USDA’s National Agriculture Statistics Service (NASS) released its third forecast of the nation’s 2010 corn crop on October 8. Its forecast was based on (1) a 15,000 scientifically selected farmer survey of expected yields and production and (2) scientifically selected objective yield surveys of 1,920 plots in actual farm corn fields along with 1,835 plots in soybean fields. The results were based on September 29 through October 5 field conditions. Variables in the objective yield plots include plant population, ear and pod counts, ear size and kernel size. When the crop in the selected plots is fully mature, it is harvested, dried and yields are measured. When the field is harvested, field losses are measured in the adjoining area and are used to calculate actual harvested yields. This year’s survey showed a continuation of the long-term uptrend in plant populations per acre although kernel sizes tended to be less than expected in previous crop reports. The U.S. corn crop is now forecast at 12.66 billion bushels, a decrease of 3.8% from the September forecast and a decrease of 3.4% from last year. If realized, forecast production would be about 6% less than estimated corn use for the new marketing year. Thus, the latest official U.S. crop estimate shows a picture of moderately tightening corn supplies for the year ahead.
Corn balance sheet
Table 1 shows U.S. corn supplies, use, ending carryover stocks and prices for the last few years, the year just ending, and our projections for the year ahead as well as very tentative indications for the following year with varying corn yields. For the September 1, 2010-August 31, 2011 marketing year, we show three alternative supply-demand scenarios. The center column for 2010-2011 uses the USDA’s October 10 crop forecast. Since there is still uncertainty about the final crop size, we have also included higher and lower production columns to give grain users a picture of potential market sensitivity and supply adequacy with differing crop yields.
Uncertain feed and residual use in 2009-10
Major uses of U.S. corn are for domestic feed, ethanol, seed, other food and industrial uses, and exports. The feed category includes a “residual” use which reflects handling and transport losses, spoilage, and possible statistical errors. The residual use category exists because feed use is calculated indirectly by subtracting known uses for processing and exports as well as ending stocks from beginning corn supplies. Beginning and ending supplies and non-feed uses of corn are measured directly by USDA and the Census Bureau. Estimated feed and residual use in the March-May quarter of the September-August 2009-10 marketing year was 36% above a year earlier, without a large change in animal numbers. Last year’s harvest was severely delayed due to a very wet fall. Some of the crop was not harvested until late December, January, and February. In a few areas, it was not harvested until spring. That created potential field losses that may not have been picked up in earlier surveys of production, although USDA’s NASS made later surveys in several states to help correct for this problem. Also, the 2009 crop was unusually wet and its test weights were considerably lighter than normal.
Corn is sold by the bushel, using 56 pounds per bushel as the official weight. USDA likely had good data on test weights for corn going into commercial storage and also had test weights from objective yield survey data. However, the increase in feed and residual use in the spring quarter may reflect several conditions related to test weight and moisture issues in farm storage that could have led to over-estimation of last year’s crop. Slightly reduced livestock numbers being fed and increased use of distillers grain to replace corn in livestock rations hint that this may have been the case. These problems would tend to show up much more in farm-stored corn than in commercial storage. Farmers normally think of their bins as holding a specific number of bushels, for example 20,000 bushels, 30,000 bushels, etc. When the bin was full, they would have expected it to hold its rated volume but actual bushels may have been less when the bins were emptied because of the lighter density of the corn. In responding to USDA surveys, farmers likely based their final reports on bin sizes and whether they were full. Then too, as farm-stored corn dried during storage and was weighed at the elevator when it was sold, the initial higher than normal moisture content may have produced greater than normal shrinkage. Also, due to excessive moisture, some stored corn spoiled and became unusable. All of these factors likely contributed to the indicated increase in feed and residual disappearance of corn in the spring quarter. Quality problems could have been a factor encouraging heavy use of new-crop corn in late summer while retaining low-quality old-crop corn to blend with new-crop later on. That in turn could help explain the very sharp drop in summer quarter feed and residual use.
Corn feed and residual use for 2010-11 and 2011-12
Crop growing season and harvesting conditions as well as the spring quarter increase in feed and residual use hint that last year’s crop may have been slightly over-estimated and was well below normal in quality. Because of uncertainty about the very summer quarter feed and residual use and belief that early-harvested new-crop corn was used as a substitute for old-crop in late summer, we have increased our projections of 2010-11 feed and residual use of corn to a more normal level, moderately above the season just ending. Livestock numbers are expected to be relatively stable, with small shifts among various classes. For 2011-12, our early projections are based on continued relatively stable livestock numbers, although 5 or 6 months of corn prices at or above $5 per bushel could change the picture. Also note that much slower growth in ethanol production in the year ahead will bring only small increases in substitution of distillers grain (DGS) for corn feeding in the next two years.
Food and non-ethanol industrial uses
Food, other industrial and seed uses of corn are relatively stable from year to year. Since there is only a very small range of uncertainty in their use levels, we project uses in these categories to be similar to the year just ending.
Exports are a more uncertain category of demand. The 2009-10 corn exports were supported by a sharply reduced South American harvest in the spring of 2009 as well as recent modest Chinese imports of U.S. corn. However, total U.S. corn exports were strongly tempered by large feed wheat exports from former Soviet republics and a record spring 2010 South American corn harvest. For this fall and winter, competition from South America will be modestly larger than last season. Possible Chinese imports of U.S. corn will depend on the final outcome of its 2010 crop. Earlier reports indicated parts of the Chinese Corn Belt had been stressed by dry weather, but USDA’s latest world crop report indicates the crop will be 7% above last year’s harvest (1). Indications from former Soviet republics are that foreign feed wheat competition will be much less intense than last season because of weather problems in important wheat producing areas of Russia and other neighboring republics. At this writing, Russia has completely halted its grain exports for the rest of the 2010 calendar year and a top official recently indicated its export ban may remain in place until the 2011 harvest is completed (2). There is some speculation in the grain trade that Russia might even have to import a small amount of grain. Parts of Europe and Canada also had serious weather problems that reduced production. Based on these developments, we anticipate slightly higher corn exports for the year ahead than projected by USDA and modestly higher U.S. corn exports than in 2009-10.
Corn use for ethanol
Corn use for ethanol has been expanding at a very rapid pace for the last several years. In the year ahead, we anticipate a further expansion, but at a much slower pace than in recent years as the industry approaches a “blend wall” (3). The blend wall exists because EPA regulations allow only a maximum ethanol-gasoline blend of E-10 (10% ethanol & 90% gasoline) for conventional vehicles. Until this maximum blend limit is changed, the only other domestic market for ethanol is the E-85 (85% ethanol-15% gasoline) blend that is available for flex-fuel vehicles. Flex fuel vehicles make up a very small but increasing percentage of the vehicle fleet. Also, as an article in the September issue of our renewable energy series indicates, this market is limited by a small number of stations that sell it and by prices that are not competitive in large sections of the nation (4).
|In the year ahead, we anticipate further ethanol expansion, but at a much slower pace than in recent years as the industry approaches a “blend wall”.
EPA has just announced that it approves the use of E-15 in 2007 and newer vehicles, and may approve its use for 2001-2006 vehicles within the next few months. If approved, the change would create a theoretical E-15 market for about 40% of the nation’s cars and light trucks. However, approval for only part of the vehicle fleet creates infrastructure problems for retail fuel stations. Extra investment for more tanks and pumps or in some cases blender pumps will be needed. Some retailers have expressed concern about liability issues that could result from using E-15 in unapproved vehicles. Because of these issues, increased demand from partial approval of E-15 is likely to occur gradually rather than in an immediate demand surge.
For the year ahead, we project U.S. corn use for ethanol to increase by 165 million bushels from last season. That’s a 3.6% increase and follows a 22.3% increase in the marketing year ended August 31, 2010. This is the same increase projected by USDA’s World Agricultural Outlook Board on October 8. There is a small chance that corn use for ethanol will expand more rapidly than projected.
The dramatically slower rate of expansion in the ethanol industry is significant in several ways. First, it allows some catch-up of expanding corn production with the expansion in use. Secondly, it means that there will be a slower growth rate in the substitution of distillers grain and solubles (DGS) for feed use of corn. Since the slower growth rate in ethanol production is anticipated to be due to the approach of the blend wall (approximately a 10% nation-wide average blend of ethanol with 90% gasoline), it creates the possibility of added pressure on ethanol processing margins as additional production capacity comes on line. Limited profitability in the ethanol industry affects its ability to bid for corn unless corn supplies are short and government ethanol blending mandates become the driving force in ethanol demand. The October crop estimate points to a tight U.S. corn supply for the current marketing year, but forced mandate-related buying of corn for ethanol is not expected unless crop estimates drop further.
A two-year perspective
To complete the corn supply-demand perspective and its feedstock market impact, it is necessary to look at least two years ahead. Further modest growth in corn use for ethanol is anticipated in the 2011-12 marketing year as government mandated blending of ethanol in gasoline continues to increase. Our balance sheet indicates that prospect, with the U.S. average corn yield at a long-term trend level, is almost certain to require more U.S. corn acres in 2011. The mid-winter to spring 2011 corn market very likely will signal the need for more corn acres. The wheat market, because of foreign weather problems, has already been signaling to farmers to significantly expand winter wheat plantings this fall, with prices sometimes as much as 50% higher than a year ago. As the corn market battles wheat, soybeans, cotton, minor feed grains and minor oilseeds for more acreage, prices of these alternative crops also will be affected. If final corn supply-demand conditions are near those currently indicated, higher corn prices needed to attract more acreage next spring are likely to be a tempering influence of profitability of ethanol production.
Prospective corn supply-demand-price scenarios with alternative crop sizes
The corn and soybean marketing years end on August 31. As the center column of table 1 2010-11 projections indicates, the 2010 corn crop is expected to be about 800-850 million bushels below anticipated use in the year ahead. That is expected to sharply reduce August 31, 2011 corn carryover stocks to about a 3.2 weeks’ supply. A normal minimum old-crop supply on September 1 to maintain use until new-crop corn is readily available in marketing channels is 4.5 to 5 weeks’ supply.
The center column of our 2010-11 projections shows production from USDA’s October 8 crop forecast, which was down 496 million bushels from the September report and down 701 million bushels from the August forecast. Current indications, based on this production forecast, show that carryover stocks on August 31, 2011 are likely to decline to slightly less than 900 million bushels, the lowest percent of use since 1996 when stocks fell to a 2.6 weeks’ supply. The column to its left shows sensitivity analysis with modestly lower final yields, while the column to the right shows potential results with modestly higher yields. If the final yield were to drop 5.8 bushels per acre from the latest estimate, as shown in the left-hand column, we would expect corn prices to move high enough to bring a modest reduction in feed, ethanol, and export uses of U.S. corn to prevent ending stocks from dropping to excessively low levels. If the final U.S. average yield is 1.2 bushels per acre higher than currently indicated, we would expect corn production to be about 6% below total use of corn. With that scenario, ending August 31, 2011, U.S. corn carryover stocks at approximately a 3.4 weeks’ supply would be anticipated. That in turn would be expected to permit slightly lower corn prices than implied by the most recent official crop estimate and slightly lower than indicated by recent futures prices.
The three right-hand columns of Table 1 show our early and very tentative projections of corn supplies and use for the 2011-12 marketing year. These projections are intended to show general tendencies toward supply adequacy or lack of adequacy in that period rather than precise estimates. The medium yield is approximately a long-run trend yield. The key indication from these projections is that more U.S. corn acres are likely to be needed next year. Our projections with a 3.2 million acre increase in 2011 plantings and normal yields show only a small increase in 2012 corn carryover stocks.
Implications for corn users
The minimum amount of corn stocks needed at the end of August has increased significantly in the last few years with the rapid growth of the ethanol industry. Ethanol producers have much less seasonal variability in demand for corn than the livestock and poultry industry. Feed demand for corn reaches a seasonal low in the summer and a peak during the fall and winter, but ethanol demand has been relatively stable to increasing throughout the year.
|With low stocks, corn prices have the potential to be very volatile.
With low stocks, corn prices have the potential to be very volatile if weather or other problems cause a modest reduction in the size of the corn crop either here or in South America during its November-April Southern Hemisphere growing season. Next spring and summer’s prices also will be very sensitive to U.S. weather conditions and fieldwork progress. This summer’s severe drought in former Soviet republics and other parts of Europe will heighten the market sensitivity to any significant changes in the Western Hemisphere supply outlook in 2010 and/or 2011. A 2 or 3 bushels per acre decline in the U.S. average yield from current forecasts would threaten to cut next summer’s carryover stocks even further below minimum working stocks needs. That in turn would signal to the market a need for higher prices to (1) encourage reduced use in the current 2010-11 marketing year and (2) to encourage at least a 3.5 to 4.5 million acre shift from other crops into corn next spring.
Soybean supply-demand balance
We use the same USDA sources of information as for corn to evaluating soybean supply-demand prospects. For soybeans, the October crop forecast also had a degree of uncertainty, due in part to sudden death syndrome problems that adversely affected yields in parts of Iowa and Illinois. USDA’s October 8 production forecast, based on conditions in the last few days of September and first few days of October, placed potential production at 3.408 billion bushels, a decrease of 2.2% from the September forecast, an increase of 1.5% from last year, and about 2.2% more than expected total use of U.S. soybeans.
As with corn, Table 2 shows USDA’s October forecast of soybean production in the center column of 2010-11 projections, with a lower-yield scenario to its left and a higher yield to the right. These production and supply levels are compared with our projections of likely soybean use for the year ahead. The projections show fully adequate soybean supplies for the year ahead unless final U.S. soybean yields are modestly lower than now indicated. However, looking ahead to the 2011-12 marketing year with a 2.7 million acre decline in plantings shows the potential for significantly tighter supplies unless the U.S. average yield is at least modestly above the long-run trend.
Key variables in the soybean balance sheet for assessing adequacy of soybean supplies for biodiesel are the domestic soybean crush and the ending carryover stocks of soybeans. The crush determines the level of soybean oil production. For the year ahead, with the October USDA crop forecast, we project soybean oil use for biodiesel to account for about 7.55% of the oil from the U.S. crop and about 15% of the oil from domestic soybean crushings. USDA projections indicate that a decline in U.S. soybean oil exports this marketing year should equal about 1/3 of the soybean oil expected to be used for biodiesel. The anticipated lower U.S. soybean oil exports are due to much better foreign soybean crops than last season. U.S. use of soybean oil for biodiesel reached a peak in 2007-08 and has declined sharply since then, due to EU’s severe import tax penalties on imports of U.S. biodiesel (5) as well as increased use of animal fats and recycled cooking oil for biodiesel, failure to renew the biodiesel blenders’ tax credit, and availability of RINs(6) from last year, when the mandate was not enforced. RINs are part of EPA’s mechanism for enforcement of blending mandates. They can be substituted for production.
Domestic soybean crushings are expected to decline moderately from last year because of increased soybean meal and oil export competition from last spring’s very large South American soybean crop. Competition from this source will be tempered some by Argentina’s aggressive domestic and export program for soy-based biodiesel. Some of its former soy oil exports will be used domestically and some will be shipped out as exports. Its biodiesel policy includes mandated domestic biodiesel blending levels and tax policies that encourage exports. The European Union reportedly is studying Argentina’s biodiesel export policies to see if they might reflect unfair trade policies. There is some chance EU might also impose restrictions on Argentine biodiesel exports (7). That adds uncertainty to the extent of its competition in soybean oil export markets. USDA projects that reduced domestic soybean crushings will tighten soybean oil supplies some in the year ahead. That’s expected to raise the season average soybean oil price moderately from the 2009-10 level. Even so, supplies should be fully adequate to meet anticipated biodiesel needs.
Soybean carryover stocks on September 1 of this year were about a 2.3 weeks’ supply, well below the normal 3.5-week minimum level needed for processing and exporting operations. Current projections based on USDA’s October crop forecast (center column of 2010-11 projections) show old-crop carryover stocks rising to a slightly more adequate 3.7-week supply by August 31, 2011. As with corn, there is some chance final crop estimates will vary from current estimates. Potential supply-demand situations with slightly higher and lower yields are shown in the right-hand and left-hand columns of the 2010-11 projections. Our projections suggest that a 1.4 bushel per acre decline in the U.S. soybean yield from the October estimate would tighten soybean supplies considerably, pushing soybean and soybean oil prices considerably higher, but still leaving adequate supplies for biodiesel. A 0.6 bushel higher U.S. yield would raise projected carryover stocks slightly from October crop projections, slightly lowering the expected cost of soybean oil for biodiesel. In short, if the final soybean crop size is near the current estimate, availability of soybeans for the year ahead is not anticipated to limit the use of soybean oil for biodiesel.
If the final soybean crop size is near the current estimate, availability of soybeans for the year ahead is not anticipated to limit the use of soybean oil for biodiesel.
With normal weather, a trend yield and 2.7 million acres shifting from soybeans to other crops, early and very tentative projections (center column of 2011-12 projections) show significantly tighter soybean supplies for 2011-12. There are a number of key assumptions in these projections, including normal South American yields for their spring 2011 and 2012 harvests.
Official USDA crop estimates at this writing indicate corn and soybean supplies will be relatively tight but adequate to meet biofuel and other demands. Early and very tentative indicators show a good possibility of continuing tight corn supplies in 2011-12 if the U.S. average corn yield is near a long-term trend yield. Key variables determining the degree of tightness include (1) the final U.S. 2010 crop estimates, (2) South American corn and soybean crops next spring, (3) U.S. biofuels policies, (4) corn and soybean acreage for 2011, and (5) weather. Soybean supplies for 2010-11 look slightly more adequate than those for corn, but with similar variables determining the degree of tightness. We will re-assess the adequacy of supplies after the U.S. harvest, when a near-final reading on crop sizes is available.
1 World Agricultural Outlook Board, USDA, World Agricultural Supply and Demand Estimates report, September 10, 2010
2 Clifford J. Levy, “Putin Extends Ban on Russian Grain Exports”, New York Times, September 2, 2010
3 R. Wisner, “Ethanol industry approaches the blend wall – cellulosic ethanol investments seriously threatened”, Renewable Energy Newsletter, Ag Marketing Resource Center, May 2010
4 R. Wisner, “Is E-85 ethanol blend competitive with E-0 outside the Midwest?”, Renewable Energy Newsletter, Ag Marketing Resource Center, September 2010
5 Wisner on biodiesel exports and EU. Renewable Energy Newsletter, Ag Marketing Resource Center
6 See Wisner, “Renewable identification numbers (RINs) and government biofuels blending mandates” Renewable Energy Newsletter, Ag Marketing Resource Center, April 2009, for an explanation of how RINs work.
7 For further detail on the possibility of EU restricting Argentine biodiesel exports, see “European Biodiesel Board Concerned Argentina Could Be Dumping Biodiesel Imports in Europe”, Biofuels Journal, December 23, 2009