Tight Corn Supply Ahead

According to USDA’s 2008 Prospective Plantings report, corn acreage is expected to drop 8 percent in 2008/09. We estimate this level of planting to translate into roughly an 800 million-bushel decline in production from 2007/08. If this reduction in acreage is realized and the current demand estimates are accurate, corn demand will exceed supply in 2009. The current delay in corn plantings will likely mean less corn acreage planted and a greater drop in production.

Ethanol production has topped the headlines in many areas as the leading culprit in the increased corn demand and therefore higher corn prices. However, the increase in ethanol production is only one element in the perfect storm that has pushed corn and other grain prices to record levels.

Another element is the growing wealth in countries such as China and India, which has given these countries’ populations the power to buy many more meat products and processed foods. Then there’s weather: Major weather problems in many areas have also reduced production of grains and other foodstuffs. China, for instance, suffered this winter from severe blizzards this winter that reduced its agricultural production. Australia’s wheat production was wrecked for the past two seasons by devastating drought. And higher fuel prices worldwide have limited increases in grain production through higher input and transportation costs.

Who buys the corn?  

The U.S. corn supply is consumed mainly by three industries: animal feed, biofuels, and industrial (such as processed foods). Here’s an overview of how sustained high corn prices could affect each industry.

Animal Feed: Currently, feed for livestock and poultry accounts for approximately 50 percent of corn produced in the United States. Feed cost is the highest variable cost for most beef operations, and beef producers will optimize their use of corn through balanced feed programs, increased use of grazing, and replacing some corn with distillers dried grains with solubles (DDGS), a by-product of ethanol manufacturing.

Pork farmers are in a more difficult position than beef producers because hogs need a diet that is higher in energy, which in the U.S. is supplied by corn. According to Iowa State University, pork production overall is not expected to be profitable until mid-to-late 2009.

Poultry producers can respond more quickly to market conditions, both on the production and marketing side of the business, due to the short time invested in raising poultry, as compared to cattle and hogs. Poultry production is expected to remain strong through at least the third quarter of 2008, declining slightly in the fourth quarter. This will reduce the demand for corn from this industry, but probably not until after harvest.

Biofuels: Ethanol is still in full expansion mode. Ethanol production capacity is expected to reach 13.5 billion gallons by the end of 2008. Although the high price of corn will keep many plants from operating profitably and at, or near, capacity, they will still consume a lot of corn. High gasoline prices have raised ethanol prices and allowed some manufacturers to post a profit even with high-priced corn.

Over the last few months, the U.S. has seen a growing anti-ethanol movement, as higher food prices have significantly affected consumers. Pressure from the public may result in changes to the current ethanol programs and subsidies. However, these changes are not likely to be implemented in 2008.

Industrial Use: Processed food companies are the least likely to limit the amount of corn used in their products. These companies are more likely to attempt to recoup costs through higher prices than to reduce the use of corn products, although higher prices could reduce consumer demand. But manufacturing, transportation, and labor costs remain key input costs affecting margins, along with raw materials such as corn.

What about limiting exports?

The U.S. exports about 18 percent of its corn production. In time of food inflation, people think first about limiting exports to increase supply at home. This is happening now in Asia, because the price of rice has increased nearly 70 percent in the last 6 months. What we’ve seen over the years, though, is that this sort of price control backfires, causing production to drop because growers can’t obtain top price for their product. Growers usually have more success by boosting yields through using better plant varieties, for instance, and more efficient growing practices. Researchers are also studying hardier strains of grain that resist drought and can survive in poor soil. But these are longer-term remedies.

Outlook

We expect that corn and other commodities will remain expensive through the rest of this year and through the 2008/09 crop year. However, high prices will eventually lead to rationing in the feed sector, unprofitable ethanol operations, and potentially reduced export demand if other countries increase their corn production. A strengthening dollar could also reduce foreign demand for U.S. corn in 2008/09. We will monitor the corn situation carefully, so please contact us for more information.

McKEANY-FLAVELL COMPANY, INC.