It’s always been assumed that the United States will have an adequate corn supply for the livestock sector. But will that always be the case? Rapid growth in corn processing and limited acreage in the United States mean that corn may become so in-demand that in the future you’ll have to pay dearly for your chief feed ingredient.
Growth in corn processing relates to aggressive construction of new ethanol plants. There are at least 54 new plants in the planning stages today, with construction expected to begin in one to three years. Bob Wisner, Iowa State University agricultural economist, projects that by 2008 total corn for processing will be at least 3.3 billion bushels — or 69 percent more than USDA has slotted for exports in 2003/2004. With current incentives, it’s virtually certain that the ethanol trend will continue upward, says Wisner.
What’s not certain, however, is the global corn export market. China has become a huge question mark and will be key to the United States’ long-term corn supply for feed.
“China is the world’s No. 2 corn exporter, but projections show that in the next five years it may be a net corn importer,” says Wisner. “China has about 19 percent of the world’s corn exports. If that supply is not available, look for the United States to fill the gap.”
Countries that offer corn-supply options just aren’t that numerous.
“There’s not another good corn supplier in the world,” says Steve Meyer, Paragon Economics. “Unlike soybeans, there’s not really a large corn-producing nation in the Southern Hemisphere.”
With U.S. and global corn demand rising, and no other nation picking up the slack, increased corn acreage in the United States would seem the best option. However, there’s not much wiggle room in U.S. acreage breakouts.
Total U.S. acreage for cotton, grains and soybeans has dropped about 10 million acres since 1997, mostly due to urbanization and environmental efforts like the Conservation Reserve Program. There are 34 million acres in the CRP program, notes Wisner. About 6 million to 8 million of them could be used for row-crop production with current technology.
“But with environmental resistance to releasing these acres, we may be fairly close to the upper level of corn acres,” he adds. “Any additional acreage would have to come from soybeans. Producers will look at corn prices and yields compared to soybean prices and yields to make determinations. Corn yields have been up steadily, while soybean yields peaked in 1994.”
Not all grain farmers could switch from planting soybeans to corn, due to crop rotations. Even if switching acres was effective one year, it may not be a long-term solution.
Add it all up, and the United States may be facing much smaller corn carryover stocks than you’re used to seeing. Wisner says minimal carryover stocks are about 650 million to 700 million bushels.
“The shocking thing is, this year could produce a record corn crop for the second year in a row; yet carryover stocks could actually drop,” points out Meyer.
While this year’s carryover stocks may not be as low as the 426 million bushels in 1995/1996, the increased corn usage has shifted the scale.
“In 1995/1996 we used 8.95 billion bushels of corn, so carryover stocks were 5 percent of annual usage,” says Wisner. “For the year ahead, we are projected to use 10.5 billion bushels, which means a comparable carryover would be 530 million bushels.”
So, corn has been inching toward record low carryovers as a percent of usage — and that’s with no major U.S. weather problems. Corn prices are likely to be higher than they’ve been in recent years, but any type of crop shortage could skyrocket prices.
“Technology makes crops more weather resistant than in the past, but droughts like in the 1980s could push corn well above $5 a bushel,” says Wisner. “Even a 7 percent to 9 percent drop as in 2002, could spike corn prices quite high.”
If corn demand remains as high as projected, prices could have dramatic swings. If that’s the case, using every pricing tool at your disposal will become critical.
“For this fall, you may want to consider locking in late spring and summer supplies for 2005,” says Wisner. “This fall looks to have fairly weak corn prices, but by next spring markets will focus on China.”
Basically, if you haven’t used forward pricing, futures and options to get the best possible corn price, you better start. With supplies inching toward demand thresholds, the corn market will become more volatile, causing greater price shifts in response to smaller variations. That is what’s happened to the hog market, and it looks like the pattern also lies ahead for the corn market.