Updated Perspectives on Adjustments to Tight Corn Supplies
Dr. Robert Wisner
University Professor Emeritus
Iowa State University
With the slight decrease from a month earlier in USDA’s October 11 U.S. crop production estimate, much of the uncertainty on the size of the U.S. corn crop appears to have been settled. The advanced maturity and early harvesting of this year’s crop likely have allowed USDA’s objective yield plots to accurately reflect final yields in most areas of the Midwest. The stage is now set for the grain trade to shift its focus primarily to demand, and South American weather and crop developments. However, one other significant supply-side variable could still be a market influence. The percentage of the crop harvested for grain might be adjusted in the November 12 or January crop production report.
Corn percent harvested for grain
The 5-year average percent of the U.S. corn crop harvested for grain was 91.9%. In the previous decade, the lowest percent harvested for grain was 87.88% in 2002-03. The range for the last 10-years, excluding 2002-03 was from a low of 90.18 to a high of 92.51. For 2012, USDA’s October estimate puts the percentage at 90.48%, a relatively small decline from the 5-year average. In 1988, a year with a similar percentage decrease in the U.S. average yield from the longer-term trend yield, 86.02% of the nation’s corn crop was harvested for grain. A decline in this year’s percentage harvested for grain matching 1988 would lower corn harvested area by 4.3 million acres from the October estimate. Depending on what yield changes might accompany an acreage adjustment, a further reduction in the nation’s corn crop of 100 to 400 million bushels is a possibility. There is some question whether 1988 is a good reference year for estimating 2012 acreage harvested for grain. In the last 24 years, there has been substantial consolidation in the beef feeding and dairy industries. These are the largest segments of the livestock industry to use chopped corn, although cow-calf producers also use some chopped corn. The 2002 percentage of the corn crop harvested for grain was only slightly higher than in 1988, and much of the livestock industry consolidation had occurred by that time.
Aside from possible additional small changes in the corn production estimate, a big question is whether demand for corn is being adequately rationed at current prices.The three main categories of demand for U.S. corn are (1) feed and residual, (2) processing for ethanol, and (3) exports. The residual category represents handling losses and possible statistical errors. A modest additional amount of corn is processed domestically for food and industrial products, but that category of demand is relatively price insensitive and does not change much from year to year.
Is feed demand being rationed?
The answer to this question will have a big impact on the seasonal pattern of corn prices. A decades-old rule in the grain trade has been that “A short crop has a long tail.” This rule meant that in years of short crops, prices had a tendency to be high at harvest time and to gradually decline later in the season as demand rationing became more apparent in the months following harvest. Part of the reason for this pattern was that in the past, hog producers typically were also corn producers. When corn prices were high, they tended to reduce hog production. The same was true of the substantial number of corn producers who fed cattle in years past. However, consolidation and large organizations now are the typical businesses that feed cattle, hogs, and poultry. They specialize in producing livestock or poultry, and typically produce little or no grain. These market participants tend to be slower to adjust production downward when feed costs are exceptionally high. Poultry producers usually are the first to adjust because of their shorter biological cycle and shorter feeding period. Since recent cash and forward-delivery prices for corn have offered little or no profit potential for much of the livestock sector, livestock producers appear to have focused primarily on nearby feed needs and their longer-term needs appear to be lightly covered.
Current projections indicate the livestock and poultry industries will do a large part of the adjustment to the short U.S. corn crop, but indicators so far show signs of only a relatively modest decline in feed demand. Our medium-yield corn supply-demand projections which reflect the October USDA crop estimates are available at http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1046. We project corn feed and residual use for the current marketing year marginally higher than indicated by USDA, with an 8.5% decline from last season. In addition to the decline in corn feed and residual use, a decline in corn processing for ethanol is expected to reduce domestic distillers grain and solubles (DGS) feeding by the corn-equivalent of 80 to 90 million bushels. The medium-yield column uses USDA’s October 11 corn crop estimate for determining this marketing year’s corn supplies. Our balance sheet also shows sensitivity analysis for slightly higher and lower corn production than indicated by USDA’s October 11 crop estimate.
USDA data on feed and residual use of corn are only available quarterly. They are calculated by subtracting other uses from the change in the corn supply at the start of the quarter to the end of the quarter. Corn export and processing volumes are measured directly. Between the stocks reports, the main indicators of feed demand are numbers of cattle on feed, hog inventories and farrowing intentions, various data on poultry and milk production, and livestock marketing weights. Also, the wheat/corn price ratio can influence the amount of wheat fed as a replacement for corn. Wheat prices in most U.S. regions are above corn prices. However, at this writing, wheat prices in a number of Great Plains states are still low enough to encourage wheat feeding. Wheat has a higher protein content than corn and a higher test weight per bushel. A general rule of thumb has been that if wheat is priced less than 10% above corn for an extended period of time, it may be economical to use it for a partial replacement of corn in livestock rations. However, soft wheat prices in the eastern Corn Belt and much of the South are high enough to reduce or eliminate feeding of that type of wheat. Also, feed wheat supplies in international markets are considerably tighter than last season, especially in former Soviet republics, Australia, and Argentina. Smaller crops in these areas may strengthen wheat prices as the marketing year progresses and restrict wheat feeding. These various indicators so far do not point to a large reduction in corn feeding. The bottom line is that both the final size of the U.S. corn crop and the USDA January grain stocks reports will be important indicators of whether feed demand is being reduced by the 9% projected by USDA. If it isn’t, corn prices may move somewhat higher corn this winter.
Is export demand being rationed?
USDA’s October supply-demand report projected a 25.5% decline in this season’s U.S. corn exports. The main indicator of whether export demand is being rationed comes from USDA’s weekly export sales report. When the summary numbers from this report are examined, the answer appears to be a very strong “yes”. But a more detailed look at the numbers as well as the foreign wheat crop situation noted above may raise doubts about whether that is the case. U.S. corn export sales by destination through October 4, 2012 and comparisons with individual buyer purchase volumes for the previous marketing year are shown in the table below. An alternative interpretation of the total export sales, when viewed by individual countries, is that their needs are very lightly covered. It is highly doubtful that corn use in these individual countries will be reduced by anywhere near the amounts indicated from sales data. More likely, these countries have much more corn to purchase. With the decline in foreign feed wheat production, a substantial part of their U.S. corn needs are yet to be purchased. The table below shows USDA, World Agricultural Outlook Board (WAOB) October 11 estimates and forecasts of this season’s wheat production by major producing countries and comparisons with last year. Note the sharp declines in production in Russia, Ukraine, Kazakhstan, and Australia. These countries were important sources of feed wheat that offered stiff competition for U.S. corn last season. Analysts in these countries indicate final production numbers may be lower than USDA indicated in October. At this writing, EU analysts also are reducing EU crop estimates from those indicated by WAOB.
Table 1. New Crop U.S. Corn Export Sales: Very Limited Forward Coverage
USDA’s October 11 world crop report forecast global wheat exports in the current marketing year to be down by about 1.01 billion bushels (corn equivalent) from last season. If this forecast materializes, it would appear to point to a large shift in demand from feed wheat to corn in the current marketing year.
Table 2. U.S. Wheat Supply and Demand
Foreign buyers also have recently been relying heavily on South American corn from Brazil’s exceptionally large second crop or winter crop harvested earlier this year. Rainfall in Brazil’s northern crop area during its normally dry winter season was exceptionally large from March through early July, allowing its winter corn yields to be well above normal. Brazilian analysts indicate (1) the probability of another similar year in 2013 is small, (2) Brazilian farmers are shifting heavily to soybeans this fall or will be when the weather permits planting, and (3) new regulations taking effect in January that sharply reduce daily hours truckers are allowed to drive will contribute to serious logistics problems in moving out a large soybean crop. Southern Brazil has had good rains this fall. However, parts of Mato Grosso and neighboring states have been drier than normal and have slightly delayed soybean plantings. Delayed soybean plantings create a risk that second-crop corn plantings will be delayed farther into the dry season than normal and will adversely affect corn yields. Weather forecasts for the region in mid-October indicated rains in the next few weeks will likely be modest and more widespread, and will allow accelerated soybean plantings.
The chart below shows USDA, Foreign Agriculture Service (FAS) October projections of Brazil and Argentina’s corn crops to be harvested the 2012-2013 crop year. It also shows projected increases from a year earlier in exports from the 2011-12 and 2012-13 crops. For South America, the 2011-12 crop year reflected corn planted in late 2011 and early 2012, and harvested in 2012. The projections show why foreign buyers have recently been relying heavily on South American supplies. For the year ahead, the USDA projections reflect a large shift to soybeans and assume a return to more normal weather in Brazil and Argentina. As a result, Brazil’s corn crop to be harvested in 2013 (starting in March and continuing into summer) is expected to be smaller than last season. Argentina is projected to have a moderate increase in corn production, with combined production for the two countries up by 168 million bushels. However, because of increased domestic consumption and stocks increases, their exports are projected to be up only about 20 million bushels.
When the large 2011-12 South American corn crops are considered along with the decline in global feed- wheat supplies, the combined numbers suggest that U.S. corn export sales may increase significantly as the marketing year progresses. In short, there are reasons to question whether U.S. corn export demand is being adequately rationed.
Demand for corn for ethanol production
This is one area where corn demand is being rationed, although the annualized rate of corn use at ethanol plants since late June has averaged slightly above USDA’s October 11 projection. USDA projects corn use at ethanol plants to decline by half a billion bushels or 10% from the 2011-12 marketing year. Weekly ethanol production for the 2010-11 and 2011-12 marketing years, along with projections for the 2012-13 marketing year at the average weekly rate from June 29 through October 12 are shown in Figure 2. Processing of corn at ethanol plants from late June through October 12 averaged about 88 million bushels per week. At that rate, annual corn use would be approximately 4.575 million bushels – marginally above the USDA projection. As we noted in a previous article, actual corn use can be affected some by the quality of this year’s corn crop. In the western Corn Belt, antidotal reports indicate corn test weights may be higher than initially expected.
At the late June through mid-October processing rate, U.S. annual ethanol production would be approximately 12.45 billion gallons. That would be 1.15 billion bushels below the marketing year conventional biofuel (corn starch ethanol) mandate. Depending on marketing year net U.S. ethanol exports, actual production for domestic markets could be further below the mandate. An early October FAPRI-Missouri analysis of likely impacts from alternative biofuels mandate waiver strategies used net U.S. ethanol exports for 2012-13 of -71 million gallons (1). If that materializes, U.S. corn starch ethanol production would be about 1.08 billion gallons below the 2012-13 mandate. Outstanding unexpired RINs at the start of the current marketing year have been estimated to equal about 2.5 billion gallons (2) and thus should be fully adequate to allow the projected amount of reduction in corn processing for ethanol – provided fuel blenders are comfortable using a large part of those RINs in the current marketing year. With increasing mandates in the 2013-14 through 2015-16 marketing years and the blend wall, a strong need for additional RINs in the next 2 or3 marketing years appears likely unless those mandates are reduced (3).
With corn processing for ethanol continuing at the average rate since late June, the resulting U.S. average ethanol blend in the nation’s gasoline supply from corn starch and sugar cane ethanol would be about 9.5%, assuming net U.S. ethanol exports are at the FAPRI projection. That would be slightly below the 10% blend wall. Recent analyses have indicated that short-term demand for ethanol to raise the octane of low-octane gasoline is a major factor in domestic demand and could prevent a sharp decline in ethanol use (4) .However, it is uncertain what minimum level of ethanol blending is needed for octane enhancement.
No ethanol mandate waiver
As of November 14, EPA has not made a decision on whether or not to implement a conventional (corn starch ethanol) biofuel mandate. Thus, any further adjustments in volume of corn processed by the ethanol industry will depend mainly on market conditions for corn, distillers grain, ethanol exports and petroleum, and the cost and availability of sugar cane ethanol imports. Six weeks into the 2012-13 marketing year, market conditions appear to be rationing the demand for corn in the ethanol industry by almost enough to meet the USDA marketing year projection.
Current estimates indicate widespread 2012 U.S. drought caused corn production to fall 14.5% or 1.82 billion bushels below last season’s total use of U.S. corn. Small additional changes in the production estimate are possible, especially through adjustments in the percent of the corn crop harvested for grain. In addition to the severe U.S. drought, less than ideal weather in several other countries contributed to reduced global supplies of feed wheat, feed grains, and oilseeds. A major question now for users of corn is whether current prices are adequately rationing demand. About one-fifth of the crop short-fall can be offset through reductions in ending carryover stocks, but large reductions will be needed in corn use. October USDA projections indicate substantial reductions corn use will occur for all three major demand categories. This article indicates the amount of rationing occurring so far this marketing year in domestic feed use and exports is uncertain. Users in these demand categories appear not to have covered their needs very far forward. Tightening world supplies of feed wheat and potential seasonal reductions in South American corn exports may strengthen export demand for U.S. corn as the marketing year progresses. Indicators so far do not point to a large decline in U.S. domestic corn feeding. Demand is being reduced some by increased wheat feeding and imports of corn into the U.S. from South America. Reports through mid-October suggest around 60 million bushels have been purchased for import. USDA projects corn imports for the marketing year at 75 million bushels. With uncertainty about export demand in the months ahead and the amount of reduction in domestic corn feeding, grain prices will be potentially very sensitive to information from USDA’s December 1 grain stocks report, scheduled to be released in early January.
Unlike the other two major categories of corn demand, the demand for corn in the ethanol industry has been rationed significantly since late June. Current corn processing rates are near those required to meet USDA projections of a 10% decline in corn use for ethanol this season. Reduced ethanol production will also reduce DGS production, thus further tightening the feed supply for the livestock and poultry industries. Only a small reduction in U.S. ethanol inventories has occurred after 16 consecutive weeks of reduced ethanol production. Lack of a sharp reduction in ethanol industries suggests that current ethanol production rates can be sustained for an extended period.
1 W. Thompson, J. Whistance, P. Westhoff, and B. Binfield, Renewable Fuel Standard Waiver Options during the Drought of 2012, October 2012, FAPRI-MU Report #11-12: http://www.fapri.missouri.edu/outreach/publications/2012/FAPRI_MU_Report_11_12.pdf
2 Darrell Good & Scott Irwin, “ The Impending Collision of Biofuels Mandates with Market Reality”, University of Illinois, Farmdoc Daily, Septmeber 26, 2012
3 For further detail on forthcoming blend-wall problems, see Ibid.
4 Tyner, Taheripour, Hurt, “Potential Impacts of a Partial Waiver of the Ethanol Blending Rules”, Farm Foundation, 2012: www.farmfoundation.org
U.S. and international corn and wheat production, exports, and stocks data are from USDA, WAOB, World Supply and Demand Estimates, WASDE – 511, Otober 11, 2012: http://usda01.library.cornell.edu/usda/current/wasde/wasde-10-11-2012.pdf