Will There be Enough Corn for 2011-2012 Feed and Biofuel Needs?

AgMRC Renewable Energy & Climate Change Newsletter
September 2011

Dr. Robert Wisner
University Professor Emeritus
Iowa State University

rwwisner@iastate.edu

This year’s combination of weather events has taken a serious toll on U.S. grain and oilseed crops. That picture was reinforced by the National Agriculture Statistics Service of the USDA in its September 12 crop production forecasts1. The U.S. average corn yield was forecast at 148.1 bushels per acre, down from a disappointing 152.8 bushels last year, 153 bushels per acre in the August forecast, and a long-term trend yield of about 162 bushels per acre2. Early in the spring planting season, some analysts had talked of possible yields in the upper 160 to mid-170s bushels per acre. The latest crop forecast indicates production will be about 770 million bushels or 5.8% below corn utilization in the year ended August 31, 2011. Adding to uncertainty for corn users, this number is still quite tentative.
 

The latest crop forecast indicates production will be about 770 million bushels or 5.8% below corn utilization in the year ended August 31, 2011.


About 1/3 of the adjustment to the smaller crop is believed to be available from reduced corn carryover stocks. That leaves about 500 to 525 million bushels of cuts from last season in needed in corn use. Important questions facing corn users include (1) which users will cut back in response to inadequate supplies and high prices, (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. In this article, we discuss these issues.

More production cuts ahead?

A reduction of approximately ½ million acres in corn for harvest as grain is anticipated in next month’s crop report. That would lower production by another 74 million bushels or 0.6%. Changes in corn yield estimates from September to the season final estimates in December or January in other hot-dry years show a mixed picture, with some years increasing and other years decreasing. The average corn plant population is high this year but smaller and incompletely filled ears have reduced the crop size. Additionally, in some areas, disease problems in portions of fields have caused premature plant death late in the season, thus stopping kernel filling prematurely. Weather and disease problems may slightly lower the average quality of the crop in comparison with last year’s excellent corn quality. Reduced quality, as reflected in lower test weights, tends to increase the bushels of corn needed for a given quantity of meat or ethanol production.

Crop maturity lags the normal progress in several Midwest states, thus creating added risks to crop size and quality if frosts should occur in the next two or three weeks. At this writing, forecasts are calling for mid-September frosts a hard freeze extending from North Dakota, the eastern 1/3 of South Dakota, across Minnesota, the northern half of Iowa, and Wisconsin, to extreme northern Illinois, and parts of Michigan. The corn crop in Ohio is considerably behind normal maturity and is especially vulnerable to frost, but is expected to avoid mid-September frosts. Another cold front is anticipated in late September.

USDA’s NASS bases yield estimates on a large survey of farmers’ expected yields plus objective yield plots in scientifically selected and evaluated samples of actual farm fields. The September report was based on a survey and field samples evaluated during the last few days of August and the first few days of September. At that time, many objective yield plots were not yet mature enough to provide precise yield data. Thus, the October and November USDA crop reports may show yield changes.

Weather developments

Weather developments that impacted this year’s crops included (1) extreme flooding of major river valleys, (2) extreme drought in the southern Great Plains and parts of the southeastern U.S., (3) very late plantings in parts of the eastern Corn Belt because of excessive rain, and (4) hotter and drier weather than normal for much of the Corn Belt in July, when the corn crop was pollinating. Extreme flooding occurred in the Ohio, Illinois, Mississippi, and Missouri river valleys and their tributaries as well as some rivers in North Dakota. In some cases, the land was planted before the floods but will not be harvested. In limited areas, some planting or replanting occurred after flood waters receded. In the Missouri river valley which affects parts of six states, much of the valley is still flooded. Inability to remove debris and sand deposits from fields, correct erosion problems, repair irrigation systems, storage facilities, and complete normal fall fieldwork may impact the 2012 crops in addition to this year’s production. 

U.S. Drought Monitor 

The Southern Plains drought has been extreme in much of Texas, Oklahoma, and the southern 1/2 of Kansas as well as parts of Colorado. This is the heart of the U.S. hard red winter wheat producing area, thus reducing wheat yields. Production of hard (mostly red) winter wheat this year fell by 22% from a year earlier. Often in times of good yields, some hard winter wheat is fed to livestock during the summer. Feeding hard red winter wheat was more limited this year than usual.

The southern and central Great Plains also are the major grain sorghum producing area. This year’s U.S. grain sorghum crop is forecast to be 29% smaller than last year and 36% below two years ago, due to lower yields and reduced acreage. The smaller crop will bring extra feed demand to already tight corn supplies. This extreme drought area is not a large producer of corn by Midwest standards, but is still significant for corn production. Declines in corn production vs. last year are currently estimated as follows for the region: Texas: -41%, Oklahoma: -51%, Kansas: -19%, and Colorado:  -13%. Total corn production in this 4-state region is estimated to be 277 million bushels below last year. Additionally, the extreme drought shown in Figure 1 has devastated pastures and severely reduced production of hay and forage. Lighter-weight cattle that normally would be kept on pasture for a longer period have been moved into feedlots, thus boosting demand for corn and distillers grain. Severe drought also threatens to delay or in some cases prevent wheat plantings this fall. Generous rains will be needed across the area to facilitate plantings and permit good wheat crop development before winter. Wheat pasture in the region normally helps extend feed supplies, but current conditions suggest very little wheat pasture will be available this season.

Corn Belt Weather

The eastern Corn Belt, especially Indiana, Ohio, and Michigan experienced a very wet spring that delayed corn and soybean plantings into early June or in some cases later. Hot, dry weather across the Corn Belt accelerated corn development, but also created pollination problems and smaller than normal ear size. In the extreme eastern Corn Belt as well as the Dakotas, Minnesota, and Wisconsin, delayed corn maturity creates risks of possible yield and quality losses if frosts occur in the next one to three weeks. Extended National Weather Service forecasts indicate fall weather should be relatively dry in the Midwest and should provide good corn drying and harvesting weather.

How will corn use be cut to fit the reduced supply?

Figure 2 shows the three corn use categories by relative size in the 2010-11 marketing year ended August 31. The composition of demand for corn has changed dramatically in the last seven years, as indicated by the contrast between Figures 2 and 3. With the rapid growth of corn processing for ethanol, food, industrial, and seed use has expanded to about ½ of the total demand for U.S. corn. Exports are now a small part of total use. For the 2011-12 marketing year, we examine the ability and likelihood of each demand category to adjust to the higher cost of corn and the tighter supplies.
 
Relative shares of major uses of U.S. Corn

Corn Utilization Trends 

Industrial demand for corn

Corn processing for ethanol and distillers grains (DGS) accounts for by far the largest part of the industrial demand for corn. About 0.4% of this use category is for seed. Seed demand is very inelastic, or in other words not very responsive to price. Another 21.9% is for various non-ethanol food and industrial products. This part of the demand also is quite price-inelastic. 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 (3) the ethanol blenders’ tax credit, and more recently (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 almost certainly 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. That will be the situation unless the U.S. energy and agriculture secretaries decide to waive part of the mandates to avoid serious economic problems. Figure 4 shows what this demand curve (in this case drawn as straight lines) looks like. The lighter vertical lines shift to the right each year through 2015 as the mandates increase. From 2015 onward they stabilize at 15 billion gallons of ethanol or about 5.36 billion bushels of corn to be blended with U.S. gasoline. At lower prices and plentiful corn supplies, 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 provides a mechanism for allowing ethanol processors to pay whatever price is needed to obtain the required volume of corn for mandated ethanol blending.

Mil. Bu. Corn Processed into Ethanoland DDGS 

A key question for livestock and poultry producers as well as foreign buyers of corn is “How much corn will be processed through ethanol plants in the year ahead”. 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 produced4. 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 strong and increasing in the past two years.5 Some analysts estimate that at the recent rates, U.S. ethanol exports may be about a billion gallons annually. In corn-equivalent terms, that would be about 360 million bushels. EU also has become a significant market for U.S. ethanol. Strong ethanol exports are being driven partly be weather problems in Brazil’s sugar-producing area, which has limited its ethanol production and exports. Because of tight supplies, Brazil has reduced its required ethanol blend percentage and this year has imported U.S. ethanol. Sugar analysts anticipate that world sugar supplies will remain tight at least into next spring and perhaps longer, thus supporting U.S. ethanol exports. Exports allow U.S. ethanol production to exceed the mandates.


The EISA mandates are for calendar years. Table 1 shows the mandates translated into corn marketing years and corn-equivalent bushels. It also compares mandates with bushels of corn processed through ethanol plants and shows approximate excess corn-equivalent bushels after deducting corn-equivalent bushels of ethanol exports. The net excess bushels for 2010-11 are rough estimates, partly because final export data are not yet available. From this analysis, we conclude that some excess RINs should be available to substitute for ethanol blending in 2012.

Table 1. EISA ethanol mandates and comparisons with U.S. corn processing for ethanol by marketing year (Bil. Gal. & Mil. Bu.)
  EPA Mandate Corn Bu. Equiv. Corn MBu. for Ethanol Excess vs. Mandate Excess after Exports
2008-09 10.0 3,597 3,677 80 43
2009-10 11.5 4,137 4,568 431 328
2010-11 12.4 4,460 5,020 540 180?
2011-12 13.0 4,676 5,000 374 14?
2012-13 13.6 4,892 5,180 288  
2013-14 14.2 5,108 5,300 192  
2014-15 14.8 5,324 5,350 26  
2015-16 15.0 5,396 5,400 4  


This analysis suggests that with expiration of the blenders’ tax credit, excess  RINs could reduce ethanol processing modestly from USDA’s current projections if corn prices are high enough and economics are unfavorable for ethanol blending.6 With tight supplies and unfavorable blending economics, corn use for ethanol and DGS might decline by 150 to 200 million bushels from the current 5.0 billion bushel USDA projection.

Factors affecting blending economics

Without a blenders’ tax credit, the economics of blending will depend partly on the premium of gasoline prices over ethanol. Premiums reflected by nearby and distant futures markets on September 6 are shown in Figure 5. The gasoline premium over ethanol is narrow in the nearby futures months but increases gradually in distant futures to 40 to 45 cents per gallon. This relationship is not a forecast, but is an approximate pricing opportunity for blenders. Basis relationships and other factors will also  influence blenders’ decisions. Incentives for blending ethanol with gasoline vary over time and may also be influenced by potential reductions in costs of the enhancing octane content of gasoline. At times, the fuel industry may have incentives for blending more ethanol than required by EISA mandates, even without the blenders’ tax credit.

RBOB Ethanol Price Spread in futures

Conclusions

Will corn processing be reduced by tight supplies? -- From this analysis, it appears that corn processing for ethanol may be reduced modestly in this marketing year, perhaps as much as 150 to 200 million bushels. However, that number should be viewed as very tentative. Whether a reduction materializes will depend on the strength of 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 have been moderately above shut-down levels for efficient plants, based on data from the Agricultural Marketing Service of the USDA7 and variable ethanol production costs from the AgMRC ethanol model8. These returns suggest higher corn prices likely will be needed if corn use for ethanol is to be reduced moderately.

Will corn exports decline? -- Early indications are that U.S. corn exports will decline moderately in the year ahead. New-crop corn export sales through September were 13.5% below a year earlier, and foreign production of feed wheat and feed grains is projected to be sharply above last year. These indicators should be interpreted with some caution because (1) it is still very early in the marketing year to evaluate trends in new-crop sales, (2) the foreign crop projections include the assumption of normal weather in South America, (3) official Chinese government data on corn supplies have been unreliable in the past and some internal Chinese reports indicate significant corn imports may be needed, and (4) the grain harvest in former Soviet republics (FSU) is not yet finished and could deviate some from current estimates that show a large increase from last year’s drought-ravaged crop. Total foreign wheat production this year is estimated in USDA’s September 12 world crop report to be about 1.32 billion bushels (corn equivalent) larger than last year. Increased feed wheat competition will likely reduce U.S. corn exports. Foreign corn production is tentatively projected to be up 5.8% or 1.16 billion bushels from 2010. Much of this increase is in the Ukraine and in South America, where the crop has not yet been planted. The National Oceanic and Atmospheric Administration (NOAA) recently indicated that it expects the La Niňa weather pattern to intensify in the months ahead. If so, that might have adverse impacts on crops in southern Brazil and Argentina.

Our export projections as well as those of USDA and most private analysts are based on normal southern hemisphere crop yields next spring, FSU crops near current estimates, and large feed wheat supplies that will reduce U.S. corn exports. Current USDA projections show U.S. corn exports dropping by 185 million bushels from last season. If attained, this would leave a needed reduction in other corn uses of around 330 million bushels. Some caution is advised in using the export projections, although current foreign crop estimates and high corn prices indicate a significant drop in exports should be anticipated. USDA’s weekly export sales reports9 will be important indicators of whether current world prices are high enough to shift more corn demand to feed wheat.

Is domestic corn feeding demand being rationed enough? -- Historically, when corn supplies are tight, much of the adjustment has fallen on the domestic livestock and poultry industry. This marketing year, the adjustment may be eased some by increased supplies of feed wheat, and foreign corn if weather is favorable in South America this winter. Ethanol economics at this writing suggest reductions in that use category are likely to be quite modest and may require higher prices than livestock producers can afford to pay for corn. Domestic cattle on feed and hog numbers appear likely to remain large into the first half of the marketing year. Cattle on feed in August in larger lots were up 8% from a year earlier. Later in the season, numbers may decline some. How much will be influenced partly by pasture and forage conditions. With high corn prices, livestock marketing weights may be reduced, which could reduce feeding rates per animal slightly. However, that should be balanced against sizeable numbers of lighter weight cattle in feedlots and lack of forage and pasture in the southern plains. Also, grain sorghum supplies will be lower than a year earlier, with feed use down 60 to 70 million bushels.. A substantial amount of domestic wheat has been fed this summer. Soft red wheat feeding may continue for a few more months, as a replacement of some corn. Also, poultry producers are beginning to reduce bird numbers. That will be another factor in adjusting to tight corn and soybean meal supplies. At this writing, it looks doubtful that corn feed demand has been rationed enough to fit the reduced supply. With only a minor reduction in corn use by ethanol plants, about 380 million bushels of reduction in corn feed and residual use would be needed. That is after adjusting for reduced availability of other U.S. feed grains that will boost potential corn demand. Perhaps as much as 1/2 of that could come from increased wheat feeding.

At this writing, it looks doubtful that corn feed demand has been rationed enough to fit the reduced supply.

 
An updated reading on summer quarter corn feeding will be available from analysis of USDA’s September 30 grain stocks report. Our corn and soybean supply, demand, and price projections are available at these web sites: http://www.extension.iastate.edu/agdm/crops/outlook/cornbalancesheet.pdf  and http://www.extension.iastate.edu/agdm/crops/outlook/soybeanbalancesheet.pdf

Price implications

The corn, soybean, and soybean meal markets will almost certainly remain much more volatile this fall, winter, and next spring than in recent years as grain users and other market participants adjust to updated supply and demand information. Modest weakness in the basis and cash prices looks likely in the next several weeks as the harvest season progresses. Barring major surprises in the October and November crop reports or serious frost damage, western Corn Belt cash corn prices are expected to remain in the $6.50 to $7.50 per bushel range for the next several months. Eastern Corn Belt prices likely will average 25 to 35 cents per bushel above this range, with still higher prices in the southern U.S. Winter prices will be strongly influenced by South American crop conditions. Late winter and early spring prices will likely again reflect a battle among corn, soybeans, and other crops for next year’s planted acreage.

References

1  NASS, USDA, Crop Production, September 12, 2011, Washington, D.C., September 12, 2011,
2 Ibid.
3 Energy Independence and Security Act of 2007 (EISA), U.S. Congress.
4 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.
5 Wisner, “Ethanol exports: what’s the trend and where are they being shipped,”   Renewable Energy Newsletter, Ag Marketing Resource Center, March 2011: 
6 USDA’s projected corn processing for ethanol in 2011-12 is from the World Agriculture Outlook Board, USDA, World Agriculture Supply Demand  Estimates (WASDE) report, September 12, 2011..
7 AMS, USDA, Iowa ethanol and co-products processing values and AgMRC ethanol model,
8 AgMRC ethanol profitability and information files
9 FAS, USDA, Export Sales, released on Thursday morning