As pork producers around the world keep a close eye on corn markets and watch as the price per bushel continues to trend up, they ask, will this trend continue indefinitely? While the industry has evaluated grain demand factors repeatedly, a deep examination of supply factors has been somewhat absent.

To discuss the grain-price trend, we need to examine both sides.

From a global perspective, world coarse-grain stocks are at historically tight levels. Based on the number of acres planted in the United States, there is potential to build world stocks and actually shrink the stock-to-use ratio.

This potential is welcomed news, since over the last few years, global production of coarse grains has not kept up with demand and has made keeping enough supply on hand difficult.

The increase in demand comes from a few main drivers. Ethanol has played a clear role. It’s a relatively new demand that accounts for more than 5 billion bushels of the United States’ total harvest of approximately 13 billion bushels. This substantial amount of corn used for ethanol production was not a factor prior to 2006.

Another demand-driving force is China’s increased utilization of commodities. China now imports about half of the world’s soybeans. The country is moving quickly from mostly backyard hog production to 70 percent industrialized production in just over 10 years.  As China moves toward an industrialized model, feeding pigs table scraps no longer suffices. Scientifically balanced rations are required to feed the animals, and that, of course, involves corn and soybean meal.

In addition to ethanol production and an increased demand from China, India also is starting to consume more coarse grains, specifically for poultry feed and dairy.

Like demand, supply is determined by a number of factors. From a global perspective, corn has faced adverse growing conditions in recent years resulting in lackluster yields in several key growing regions. A drought in Russia in 2010, less-than-desirable yields in the United States and volatility in South America have all contributed to a supply deficit. That, in turn, has generated higher prices, which has made planting more corn acres attractive to farmers, though doing so brings a host of challenges.

In a recent Rabobank International Food and Agribusiness Research and Advisory group report, researchers found U.S. corn yields are not growing at a high enough rate to overcome low global stocks. The report titled “Can Corn Keep Up?” finds that yields are likely to grow at a much slower rate than historical and trendline analysis would suggest. It anticipates that 2012 growth will be well below current USDA estimates.

The two main factors in the anticipated decline in corn yield growth are the recent and dramatic expansion of planted geographies and an increase of corn-following-corn crop rotations in the Midwest.

Since 2006, more than 3 percent of the total harvested U.S. corn acres has shifted from Corn Belt states, which record five-year average yields of 160 bushels per acre or more, to Plains states that produce five-year average yields of 130 bushels per acre or less. These lower-yield-producing states are expected to grow more than 4 percent of the national harvest in 2012.

The expansion of planted area also makes corn production more susceptible to weather conditions over a broad area. In 2011, for example, millions of acres were impacted by drought in Kansas as well as overly wet conditions in the Dakotas.

The economic incentives to plant corn in place of alternative rotation crops have led to a trend of planting corn on soils where corn was grown the previous year. The lack of year-to-year crop rotation causes an increase in harmful pests and a general reduction in soil productivity.

In primary corn production states, the corn-on-corn trend is particularly pronounced. Through the analysis of USDA data, the Rabobank report estimated 30 percent of the total corn acres grown in Iowa in 2011 were planted on land which grew corn the previous year. Prior to 2005, the corn-on-corn acres planted in Iowa were closer to 10 percent of the total crop.

Globally more acres are needed to produce enough corn to satisfy demand. Unless the supply challenges discussed previously can be addressed, pork producers can count on higher grain prices over the long run.

As 2012 continues, pork producers are looking to determine what their next steps should be. Hog prices have been strong, but the prices haven’t resulted in much swine herd expansion. Many small to midsize operations have indicated a reluctance to expand, due to corn price volatility. Sensitivity to potential corn price increases — such as if the 2012 corn crop fails to begin restoring world supplies — and an increased reliance on export markets add up to price volatility for pork production.

As pork producers look for opportunities to lock in corn prices, final planted acreage for corn in the United States will be a key component of the decision process. This year is expected to bring a record number of planted corn acres. If planted acres exceed 94 million, yields will become less important and having a crop large enough to begin restoring world supplies becomes more likely. However, a national yield average of less than 152 bushels per acre would likely result in higher corn prices.

Rabobank Food and Agribusiness Research and Advisory research and reports are available exclusively to Rabo AgriFinance clients. If you’re interested in learning more about how our group’s research can provide insight into your daily business decisions, please visit our website at RaboAg.com.