Global crops, ethanol and weather drive ag outlook

by Jay Sjerven
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Joseph W. Glauber, the U.S. De-partment of Agriculture’s chief economist, described what he called three “key drivers” in the current U.S. agricultural supply-and-demand outlook in his presentation before the Agricultural Outlook Forum in Washington on Feb. 23. These were record-large world grain crops in 2011-12, a slowing in U.S. corn-based ethanol production and weather.

“Record prices in late 2010 and through the first half of 2011 resulted in increased plantings and record production for grains and cotton,” Mr. Glauber said. “Soy-bean production, while off the 2010-11
record, was still the third highest on record.”

According to the U.S.D.A.’s February revisions to its world supply and demand estimates for 2011-12, global wheat production was a record 692.88 million tonnes, world corn production was a record 864.11 million tonnes and world rice production was a record 462.75 million tonnes (on a milled basis). World soybean production was 251.47 million tonnes compared with a record 264.18 million tonnes in 2010-11.
Mr. Glauber said global demand largely kept pace with production.

“Total wheat consumption topped 680 million tonnes, total corn use was more than 867 million tonnes, and total rice use was 460 million tonnes. All of these figures were records. At 258 million tonnes, global soybean use also was a record in 2012 (2011-12).

“With the exception of corn and soybeans, strong production response in 2011-12 has resulted in stocks rebuilding for most commodities,” Mr. Glauber continued. “Wheat and rice stocks have rebuilt from low levels reached in 2007-08, though demand remains strong.”

In contrast, the U.S.D.A. forecast world corn ending stocks in 2011-12 at 125.35 million tonnes, down 3% from 128.83 million tonnes in the previous year and compared with 144.18 million tonnes in 2009-10.
“World ending stocks for corn for 2011-12, expressed in terms of use, are estimated at about 52.3 days of use, the lowest level since 1973-74,” Mr. Glauber said. World soybean ending stocks in 2011-12 were forecast at 60.28 million tonnes, down 13% from 68.9 million tonnes in 2011-12.

Ethanol production slows
A second driver in the outlook was slowing ethanol production in the United States.

“After increasing by almost 700 million bus per year over 2005-10, (U.S.) corn use for ethanol has flattened and is projected to fall by 21 million bus in 2011-12,” Mr. Glauber said. The U.S.D.A. forecast for corn use for ethanol production in 2011-12 was 5,000 million bus compared with 5,021 million bus in 2010-11.

Mr. Glauber pointed out that under the 2007 Energy Act, the maximum amount of conventional biofuels that may be applied toward the renewable fuel standard (R.F.S.) is 13.2 billion gallons in 2012. The expiration of the Volumetric Ethanol Excise Tax Credit and the other duty and charges on imported ethanol on Dec. 31, 2011, has meant that corn-based ethanol produced beyond the 13.2-billion-gallon mandate will have to be attractively priced to be profitably blended with gasoline.

“Ethanol production levels have dropped about 4% since Jan. 1 but still remain at almost 14.2 billion gallons, on an annualized basis,” Mr. Glauber said. “Margins for ethanol producers have fallen as well in recent weeks, reflecting the drop in ethanol prices.”

Mr. Glauber said the principal long-term issue for corn-based ethanol was how much ethanol may be absorbed in the domestic gasoline supply — the so-called blend wall.

When the Energy Act of 2007 was passed, forecasts by the Energy Information Administration for gasoline consumption implied almost 150 billion gallons of blended gasoline would be used in 2013, Mr. Glauber said. With the recession and subsequent sluggish economic recovery, however, forecasts for trans-portation fuel demand have been revised lower. The E.I.A.‘s current forecast of blended gasoline fuel consumption in 2013 was less than 134 billion gallons.

“The current penetration rate of ethanol at roughly 10% implies a blend wall of about 13.5 billion gallons,” Mr. Glauber said. “Ethanol pro-duced in excess of 13.5 billion gallons must be held as stocks or exported.”
Mr. Glauber said U.S. ethanol exports in 2011 set a record at 909 million gallons with about 43% of that total going to Brazil. But with world sugar prices falling (Brazil makes ethanol from sugar), U.S. ethanol exports to Brazil likely will fall this year, he said. Because of the expected decline in ethanol exports, U.S. corn use for ethanol was expected to fall by 50 million bus in 2012-13 to 4,950 million bus.

“In the short run, growth in corn use for ethanol will be driven by the mandated levels under the R.F.S. and the blend wall,” Mr. Glauber said. Over the longer term, further expansion largely will be determined by the relative attractiveness of ethanol prices compared with gasoline prices and the ability to market ethanol blends with more than 10% ethanol by content, he asserted.

Dry conditions affect yields
The third driver of the current agricultural supply and demand outlook was weather.

“Devastating drought conditions prevailed over much of the southern Plains causing poor yields and high abandonment rates in 2011-12,” Mr. Glauber said. “Unfortunately, dry conditions have persisted in the region and worsened in the Southeast. It is still premature to conclude much concerning yield pro-spects for 2012 crops, and much can happen between now and planting time. Nonetheless, weather will be a key concern this year, particularly in Texas.”

High crop prices in 2011 encouraged increased winter wheat plantings in the United States last fall. Mr. Glauber said all-wheat acres in 2012 may total 58 million acres, up 3.6 million acres from 2011.
Mr. Glauber said U.S. growers may plant 94 million acres to corn this spring, which would be the largest corn area since 1944. Soybean producers were expected to plant 75 million acres to soybeans, unchanged from 2011.

Mr. Glauber said wheat and corn prices in 2012-13 likely will be much lower than in the current year. In the case of corn, the U.S.D.A. preliminarily forecast the average farm price in the upcoming year at $5 a bu, down from $6.20 as the midpoint of the projected price range for 2011-12. The average farm price of wheat in 2012-13 was forecast at $6.30, down a dollar from $7.30 a bu as the midpoint of the projected range for the current year.

At the same time, the price decline envisioned for soybeans was slim. The U.S.D.A. forecast the season average farm price of soybeans in 2012-13 at $11.50 a bu, down only 20c from $11.70 as the midpoint of the projected price range for 2011-12.

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