Challenges for the U.S. corn sector
Despite all the contentions that world food demand is growing much faster than world production, setting the stage for bull grain markets in the future, it appears that the U.S. corn market faces some real challenges. According to the USDA’s forecast released in August, U.S. corn production will exceed use by more than 1 billion bushels this year, even with the yield about 10 bushels per acre below trend. No real relief from this imbalance is in sight.
click image to zoom The growth in demand fueled by rising ethanol use appears to be at an end. The EPA has announced that it will use the flexibility in the law to lower the ethanol mandate for 2014 below the 14.4 billion gallons previously set. With ethanol use at the “blend wall” the amount of corn used for ethanol will likely level off around 5 billion bushels, or a little less. This indicates that demand growth will need to come from somewhere else.
Feed and residual use accounts for about 40 percent of total corn demand, but the amount actually fed will probably not change significantly over the next few years. It will take time to rebuild animal numbers and some of the market has been lost to DDGs. Corn feed use has declined pretty dramatically in recent years, falling from 6 billion bushels a decade ago to about 4.5 billion this season. One reason for this has been the rise in the production and feeding of DDGs from the ethanol industry. With ethanol production expected to level off over the next few years, the competitive supplies of DDGs will also level off. Corn may not win back all of the market lost, but at least feed use should stabilize and some rebound is possible.
If we assume that feed use rebounds to the average over the 2009/10 through 2011/12 period that puts demand at 4.8 billion bushels per year. The average is lower if we use the last three years – but the high prices caused by the 2012 drought may have had a significant impact on feed use. If we assume that ethanol use levels off at about 4.9 billion bushels per year the full food, seed and industrial (FSI) category would be near 6.3 billion bushels. These assumptions would put domestic corn use at about 11.1 billion bushels over the next few years.
click image to zoom The hope is that U.S. corn exports will rebound to soak up some of the production. U.S. corn exports were above 2 billion bushels per year back in the mid-2000s, but this year they are only about 1/3 that large. In recent years production has soared in Brazil and Ukraine and both countries have become major exporters. This season Brazil is the world’s largest exporter with shipments near 1 billion bushels. This is a ten-fold increase from how much they exported in the mid-2000s. There has been a similar increase in exports from Ukraine. The two big questions are – can the U.S. take back market share from these new competitors? – and how much will total world trade increase?
If farmers plant 92 million acres of corn in the next few years (down from 97 million this year) and the yield is say 162 bushels per acre a figure that is at least a few bushels under the long-term trend), we need to export 2.5 billion bushels for production and use to balance. Getting exports to that level will be extremely difficult. With total world trade near where it is now the U.S. would have to have a market share of 65 percent or higher. The average market share for the U.S. in the mid-2000s was 63 percent.
click image to zoom If exports rebound to around 1.5 billion bushels, that puts total demand (domestic plus exports) at 12.6 billion bushels. Again, assuming a below trend yield of 162 bushels per acre, corn production would match use if farmers plant only 85 million acres. Cutting corn acreage by 10 million acres or more would require a huge adjustment in both the farm and the agribusiness sectors. This is pretty scary near-term math and it is hard to see a different outcome near term – unless China suddenly becomes a BIG importer.