It started with corn three years ago when the U.S. government raised ethanol requirements and nearly overnight created a new market for about a quarter of the U.S. corn crop.
Since the Energy Policy Act of 2005 was signed on Aug. 8 of that year with a 7.5 billion gallon renewable fuel standard (R.F.S.) by 2012, corn prices have skyrocketed, pulling other primary grains and oilseed prices to record highs in their wake. While strong demand, drought in key production areas, commodity index funds, record high crude oil prices and record weakness in the U.S. dollar all contributed to rising commodity values, ethanol — rightly or wrongly — still receives much of the spotlight in discussion of high prices.
With the R.F.S. set at 36 billion gallons by 2022, and the traditional biofuels component at 15 billion gallons, the trek into uncharted territory for corn and other commodity markets is set to continue with a new "plateau" under which corn prices are unlikely to drop established at $4 a bu, many analysts indicate.
"This market is going to remain a spicy meatball for some time to come," said Dan Basse, president of AgResource Consulting Group, Chicago.
Corn prices have nearly tripled in three years, based on the continuous futures price at the Chicago Board of Trade, rising from around $2 a bu in late April 2005 to over $6 recently, with record highs well over that mark set in deferred contracts.
As may be expected, analysts’ forecasts of corn prices vary, with some expecting values to fall to $4 but others calling for prices to rise to the $7 level, with an extreme high forecast as high as $12.
Mr. Basse expects nearby corn futures will "not weaken any time soon," trading in the $5.50@7 a bu range for the rest of the year, with some possible pressure at harvest time, noting that weather will be a "big deal" through the growing season.
Terry Francl, senior economist for the American Farm Bureau Federation, forecast December corn futures prices, currently around $6.20 a bu, will settle to the $5.50@6 range once planting is completed.
How many acres will be planted this year remains unclear, although it is certain acreage will be well below last year’s level. In its March 31 Prospective Plantings report, the U.S. Department of Agriculture indicated farmers intend to plant 86 million acres of corn in 2008, down 8% from 93.6 million in 2007, which was the largest acreage since World War II. Most of the "lost" corn area went to soybean acres, which were expected to be up 18% from 2007.
Mr. Basse said AgResource surveys indicate farmers are likely to stick with the 86 million planted acres indicated in the Prospective Plantings report. But others expect more acres.
"We expected more (than 86 million acres) and we still think we’ll see more corn," said Geoff Cooper, director of ethanol and business development at the National Corn Growers Association. "But certainly a reduction in acres makes weather so important."
Mr. Francl said the final planted area could be plus or minus 3 million acres from the intended 86 million acres. He has been using an estimate near 89.5 million acres.
Steve Freed, director of research for ADM Investor Services, Inc., said planted area could vary 2 million to 4 million acres, also citing weather as a determining factor.
Weather conditions will be crucial
Weather so far this spring has been challenging for farmers with prolonged cool, wet conditions, and low soil temperatures, delaying corn planting across the Midwest and northern areas of several southern states. As of April 20, corn planting in the 18 major producing states was only 4% completed, compared with 17% as the 2003-07 average for the date, the U.S.D.A. said. More telling, though, was that no plantings were recorded for top producing Iowa, which usually has 12% planted by the same date, and only 1% in Illinois, which usually has 29% in the ground.
While farmers still are able to plant corn in May, yields begin to decrease about 1.5 bus per day for each day after May 10 in much of the Corn Belt, research from several universities indicated, although some analysts put the key date at April 20. Farmers also may switch to corn varieties with shorter growing seasons, if available, but those tend to have lower yields than full-season varieties. The longer weather delays corn planting, the less likely area will be above the 86 million acre U.S.D.A. number or at the 155 bu-per-acre trend yield, the analysts said.
The key period will be summer weather with corn pollination beginning in July across the Corn Belt. While the wet spring has made planting difficult, it should bode well for the rest of the growing season with ample soil moisture heading into summer. And analysts noted that most weather observers are calling for benign summer weather, indicating no extremes of high temperatures or lack of rain that could trim corn yields. One cautioned that even a perceived weather problem may amplify gyrations in corn futures prices and easily send values to $7@8 a bu.
Several factors will affect the supply and price scenario for corn in addition to weather. Additional influences include commodity index funds, prices of other commodities (including crude oil), supply in other countries, feed demand and of course ethanol production.
"Any discussion of corn prices has to look at index funds in commodity markets," Mr. Cooper said. The funds were "wreaking havoc" in commodities and might account for a third of the price increase in corn, or about 80c a bu, since 2007, he said.
Mr. Francl estimated the index fund "inflation" at 70c a bu or more and said there was "no indication to date they are going to reduce participation in the market."
Index funds began pouring billions of dollars into commodity markets several years ago when commodities were seen as undervalued relative to other investment classes and are blamed for increasing volatility by exaggerating price moves.
But others have questioned the degree to which index funds have pushed prices to record levels. In a recent presentation, William G. Lapp, president of Advanced Economic Solutions, Omaha, was asked whether index funds were the cause of the market surge. Mr. Lapp challenged the idea that funds have more than a short-term impact, urging a focus instead on the tight supply and demand situation in grain markets.
"Funds may decide the path we take, but fundamentals determine where we end up," he said.
Corn costs slow ethanol expansion
"We are seeing a slowdown in expansion of the ethanol industry," Mr. Cooper said. "High corn prices are one reason for that." But he noted that limited plant construction capacity and a shortage of some equipment also have contributed.
Ethanol plants were coming online in about 18 months, from ground breaking to production, about three years ago, Mr. Cooper said. Now it’s closer to 24 months. About 12 to 15 plants that were expected to be online by April are not, he said.
"Overall, existing plants up and running are doing okay if they contracted corn at $4.50@5 a bu," Mr. Cooper said. While break-even models vary, if a plant pays $6 for corn, ethanol needs to be $firstname.lastname@example.org a gallon, he said. "But very few are paying $6 for corn," he said. Meanwhile, ethanol prices have hovered near $2.50 a gallon. But corn prices at current levels or higher will continue to crimp the ethanol industry in the months ahead, he added.
Helping profitability has been strong prices for distillers dried grains, the major byproduct from ethanol production and a feed ingredient that may replace corn, mainly in cattle rations.
"For 2007-08 we estimate 800 million bus of corn have been displaced by D.D.G.s," Mr. Cooper said. "Next year we expect 20 million tonnes of D.D.G.s will displace about 1,000 million bus of corn." A few years ago the industry was concerned about "what to do" with potentially huge supplies of D.D.G.s from the ethanol industry. Now D.D.G.s are selling for $180@190 a ton, every ton is being moved and new plants not yet online already have D.D.G.s sold on contract, Mr. Cooper said.
Although the U.S.D.A. trimmed corn use for ethanol as 2007-08 has progressed, corn demand from the ethanol industry is expected to increase year over year due to the annually increasing R.F.S. Mr. Cooper forecast use at 3,900 million to 4,000 million bus in 2008-09, up from 3,000 million to 3,100 million in the current year, although he noted $7 corn would "trim it back."
Feed demand seen shrinking
Although livestock and poultry feed demand in 2007-08 is up from a year ago despite high corn prices, analysts indicate producers finally have begun to reduce breeding herds, which should reduce feed demand in the second half of 2008 and for all of 2009.
Feed use remains the largest component of corn demand. In its April supply/demand report, the U.S.D.A. projected domestic feed use of corn at 6,150 million bus, up 200 million, or 3%, from its March projection and up 552 million bus, or 10%, from 2006-07.
"At the $5-plus range average farm price, it doesn’t appear prices to date have caused livestock producers to reduce their production," Mr. Francl said, although he noted announcements by Smithfield Foods, Inc. to reduce its sow herd 4% to 5% beginning in February and by Pilgrim’s Pride Corp. to reduce broiler output 5% beginning in June, both citing rising feed costs. "In the rest of 2008 we’ll see more of those announcements."
Profitability in the livestock sector has been boosted by strong demand for protein, especially foreign demand, which also was encouraged by the weak dollar, several analysts said. As a result, feed demand has been stronger than expected.
The U.S.D.A. estimated producers currently are losing between $25 and $35 per hog sold. The latest U.S.D.A. Hogs and Pigs report also showed producers plan to breed 2% fewer sows than a year ago in the summer quarter. For beef, the U.S.D.A. said in its April 18 Cattle on Feed report that placements of cattle on feed in March were the second lowest for a March since the report series began in 1996. And the U.S.D.A. forecast slower turkey and broiler production growth in the second half of 2008, with broiler outturn declining in the fourth quarter.
The exception could be dairy, where "herds are continuing to expand in response to last year’s favorable returns" despite increases of 33% in the primary dairy cattle feed ration in 2008, which followed a 34% increase in 2007, the U.S.D.A. said.
Exports continue at runaway pace
Foreign demand for corn, mainly as feed, has been torrid. Total export sales commitments in the first 32 weeks of the marketing year through April 10 were about 2,160 million bus, 23% ahead of the same period in 2006-07, the U.S.D.A. said in its April 17 weekly export sales report. Net export sales would have to average only 17 million bus weekly in the final 20 weeks of the marketing year to meet the projected U.S.D.A. total of 2,500 million bus for 2007-08. Weekly sales averaged 67.5 million bus in the first 32 weeks.
Analysts noted export demand for U.S. corn was boosted this year to replace feed wheat in several countries as wheat supplies were either short or diverted to food use. The weak U.S. dollar further encouraged foreign purchases.
Mr. Francl forecast 2008-09 U.S. corn exports to range from 2,000 million to 2,100 million bus as high prices ration corn demand and increased global wheat supplies displace corn as livestock feed. Mr. Basse suggested exports could shrink to 2,250 million bus as the result of increased shipments from Argentina and Brazil and increased wheat feeding. Other analysts expect exports will hold at or above 2,300 million bus, especially if China continues to limit corn exports.
Even with reduced exports and domestic feed demand in the next marketing year, 2009 ending stocks could get precariously tight. Mr. Freed said early projections from many analysts fall into the 575 million to 580 million bu range, which would be less than half of the U.S.D.A. projected 2008 ending stocks of 1,283 million bus.
Mr. Basse projected historically tight ending stocks of 350 million bus for next year. Other analysts suggested "anything under 1,000 million bus" as 2008-09 ending stocks would support strong corn prices.
Mr. Cooper countered that planted area above that indicated in the Prospective Plantings report with yields around 155 bus per acre and contraction in livestock and poultry feeding may bolster supply to the point carryout will not be drawn down much in 2008-09.
Finally, while much debate swirls around the use of grain for fuel versus food, the actual food use of corn remains static. U.S.D.A. data indicates domestic food use of corn held between 1,360 million and 1,380 million bus for the three most recent marketing years.
Analysts noted corn production will have to increase significantly in coming years to meet the total needs of the demand-driven corn market. Mr. Basse suggested the United States will need to plant 96 million to 97 million acres of corn in 2009. Other analysts agreed that a minimum of 94 million acres was needed. While some acres will become available from the Conservation Reserve Program next year, most will be pulled from other grains and oilseeds, just as they were pulled from corn this year.
But that will have to wait since actual 2008 planted area for corn and other crops won’t be known until the June 30 U.S.D.A. Acreage report, which analysts agreed was growing in importance daily.
This article can also be found in the digital edition of Food Business News, April 29, 2008, starting on Page 1. Click