Corn Repeats the Feat

Once again, the corn crop recouped from bad weather to deliver a record corn yield per acre and the second largest crop ever recorded.
By Susanne Retka Schill | November 11, 2009
Corn is king of American crops. It is grown on more acres than any other crop in the U.S at just over 86 million. In an impressive recovery from late planting and a cool summer, corn supplies are forecast to be sufficient for all users, perhaps more than ample, depending on the impact of the mid-October killing frost. Some analysts said the crop was mature enough that a killing frost wouldn't affect total supplies. Others said the frosts could hurt final yields.

The push and pull of corn market factors helped it recover from the typical pre-harvest September low rather quickly in view of the forecasted big supply, with December 2009 corn futures increasing from September's lows by about 65 cents per bushel by mid-October. "For corn, the ethanol industry has experienced a substantial economic recovery," says Darrel Good, University of Illinois corn marketing specialist. "The economics of blending ethanol are very favorable, increasing the demand for and price of ethanol. Even with higher corn prices, ethanol production has moved solidly back into the black. The USDA did not increase the forecast of corn use for ethanol during the current marketing year, but many analysts believe there is potential for use to exceed the projection of 4.2 billion bushels." By comparison, the USDA's preliminary figure of corn used in the 2008-'09 marketing year was 3.7 billion bushels when it closed Aug. 31.

Other sectors of the corn market are balancing each other out, according to Good. "The USDA did lower the projection of 2009-'10 marketing year corn exports by 50 million bushels, but increased the feed and residual component by 50 million bushels," he says. "The year-over-year increase of 169 million bushels in feed and residual use appears generous in the face of declining livestock numbers and a large increase in distillers grain production, even with reduction in feed use of other grains," he continues. "Still, year-ending stocks of 1.67 billion bushels are not large and could be less if the crop is smaller and ethanol use larger than projected."

Even though USDA backed off its projections for corn exports in the October report compared to the previous month, exports are likely to keep pace with the levels of recent years. China will once again figure into export news, with the Oct. 9 World Agriculture Supply and Demand Estimates projecting China's corn production to be down due to unusual heat and dryness hampering corn pollination. "Global demand is strong and global production is projected down," says Erick Erickson, USGC special assistant for planning, evaluation and projects for the U.S. Grains Council. "This leaves U.S. farmers in a competitive position considering USDA projects a near record corn crop of 13 billion bushels." Erickson adds while corn exports are projected 50 million bushels lower, the estimated 2.1 billion bushels for the current marketing year is still greater than last year's 1.8 billion bushels.

Demonstrating New Price Relationships
The projections for a 13.02 billion bushels corn crop, based on conditions around the first of October, reflect the potential for a record U.S. average corn yield of 164.2 bushels per acre. With carry-in supplies from the previous year, that puts the U.S. corn supply at 14.7 billion bushels for the current marketing year.

In pre-ethanol days, those sorts of numbers sent the markets into a dive. Just five years ago, the then-record 160.4 bushel-per-acre yield that produced an 11.8 billion bushel crop sent the average U.S. farm price to $2.08. It stayed at $2 per bushel for the next marketing year, 2005-'06. At those prices, the Farm Program's counter-cyclical payments kicked in, subsidizing U.S. corn farmers with a 30 cent-per-bushel payment for the 2004-'05 crop and 35 cents per bushel the following year. That was the last year corn prices were low enough to trigger the counter-cyclical payments. "Rapid growth in corn processing for fuel ethanol has dramatically transformed Midwest crop-based agriculture in the past few years," says Bob Wisner, energy economist with the Ag Marketing Resource Center at Iowa State University. "It has transformed Midwest agriculture from a sector that experienced excess production capacity, low prices and government income supports to a growth sector with frequent periods of tight supplies even with good crop yields."

It's been two years since corn began to follow the energy markets more closely. Since late 2007, the corn price index has followed changes in the ethanol price as the share of ethanol use has grown. In the 2007-'08 marketing year (which runs Sept. 1 to Aug. 31), ethanol accounted for about one-quarter of the total demand of U.S. corn versus 19 percent and 14 percent, respectively, in the previous two years. Ethanol use is now projected to be one-third of corn production and, according to Wisner, some projections show it becoming the top corn market, using more than the feed sector, and could possibly reach 50 percent of total corn use in the years ahead under some scenarios.

Increased ethanol use has, in turn, introduced new complexities to the corn market. Not only are the corn supply and livestock feeding trends to be considered, but also the price of crude oil and the ethanol mandates and blend restrictions. Mid-2008 saw a highly unusual confluence of factors that combined to drive commodity markets to record highs: a weather scare in the Corn Belt, a poor world wheat crop, and high crude oil markets. Months later, the course changed. It's highly unusual for all such market drivers to move up and down in tandem like that, says Pat Westhoff, program director with the Food and Agricultural Policy Research Institute at the University of Missouri. The way some factors pushed prices higher this fall, offset by others pushing lower, is far more common.

Corn market watchers are building the new relationships into their analyses and determe the limits to corn markets following energy. In late 2008, as the markets trended downward, analysts correctly predicted that corn would follow ethanol and petroleum prices downward until crude oil dropped below $50 a barrel, when the relationship would weaken. "The mandated ethanol markets tend to provide a floor in ethanol demand," Westhoff says. Furthermore, he suggests the mandated volumes will also serve as a floor to ethanol prices whenever a future tight corn market drives up corn prices due to a poor crop in the U.S. or overseas.

This year's total corn supply of 14.7 billion bushels is about 2 billion bushels larger than the 2006 supply Westhoff points out, and ethanol use this year is projected to match that growth at 2 billion bushels higher than three years ago. "We see continued growth," Westhoff says, "but it's much, much slower growth than we've seen in the past several years. We've increased ethanol use of corn by 2 billion bushels in three years; we don't expect to go much over that the next 10 years." FAPRI has projected the impact of that growth on corn prices over the next 10 years as well, which Westhoff says shows the average projected price no higher than the past two years. The season average farm price for corn in 2007-'08 was $4.20, and $4.06 in 2008-'09. "That's as high as we get in our baseline projections up to 2019," he says. "That's an average price, so in a given year it could be higher."

Bushels for All
Long-term, the question arises of whether the corn market can keep up with the demand from all sectors. The National Corn Growers Association points out that demand for corn in the livestock and poultry sector has been relatively flat in the past 10 years and raw field corn fed to livestock is expected to decline slightly as more corn is displaced by distillers grains. Growth in the amount of corn used for human food processing also has been flat, and corn exports have trended up only slightly, although exports of distillers grains have increased. With relatively flat trends in the traditional markets, it is all the more important that ethanol has come on the scene and grown in its corn usage as corn yields continue to trend upwards. In 2008, the NCGA pointed out that with average corn yields increasing at a rate of 3 bushels per year, by 2015 average corn yield could reach 165 bushels per acre. This year's yield is likely to come in just under that. The NCGA's "15x'15x15" vision introduced three years ago called for a 15 billion bushel corn crop by 2015 to provide for 15 billion gallons of ethanol production. The ethanol goal would make up 10 percent of the gasoline market and use 5 billion bushels of corn. The remaining 10 billion bushels is more than the combined demand for the food, feed and exports in recent years.

Ethanol advocates point to such numbers and this year's record corn yields and crop numbers to defend corn ethanol. Renewable Fuels Association President and CEO Bob Dinneen pointed out in a news release following a USDA crop report this fall that yield growth alone will provide the additional corn needed by the ethanol industry in 2009 and 2010. "Not a single additional acre of corn is needed over last year's level to meet the industry's additive feedstock demand." After another crop report, Growth Energy published a news release quoting CEO Tom Buis: "There's a mountain of corn out there plenty of grain to meet demand for food and fuel. Ethanol opponents would have you believe that using corn for ethanol forces up prices for food. We have a surplus of corn, so where is the drop in food prices? Opponents to renewable ethanol would have you believe global food demand forces indirect land use changes when an acre of corn in the U.S. goes to ethanol instead of food. Yet we're growing more corn out of fewer total acres," Buis said. "The data speaks for itself. The crop numbers undermine the arguments our opponents make against producing ethanol."

Brian Jennings, executive vice president of the American Coalition for Ethanol, even suggested the ethanol industry could make an argument that the renewable fuels standard mandates for corn ethanol be increased because corn growers historically overproduce and will continue to do so because of better farming practices and scientific advancements. EP

Susanne Retka Schill is an assistant editor at BBI International. Reach her at sretkaschill@bbiinternational.com or (701) 738-4922.