Last week a Missouri ethanol refinery, operated by POET, announced it was suspending production because of the inability to find enough corn. Others may have taken the same action, but the reason may not have been as pronounced. There is no surprise about spot shortages of corn following the drought of 2012, and more will be identified as the marketing year progresses. In fact, the low yields of central Illinois prevented sufficient supplies to larger ethanol plants, which have purchased trainloads of corn from higher-yield areas in Minnesota and the Dakotas. In the southeastern U.S., livestock producers have found their shortage is better supplied by offshore sources, such as Brazil, than try to obtain odd lots where possible in the U.S. As a result of the trend, questions are raised about the stress on the corn user as a result of the tightening availability of corn.
USDA’s Jan. 11 report on the final production estimates for 2012, along with the Dec. 1 quarterly grain stocks, give an indication of the significance of the shortage. Ending stocks are at record lows, corn imports are projected and typical users are either going elsewhere for corn or seeking alternatives. That is the assessment of Bob Wisner, Iowa State University ag economist, who says despite the expectation for short supplies, prices have not begun to ration those short supplies yet. And he says that will have to happen between now and the end of August.
One of the largest users, the livestock industry, created some market confusion at the outset of the 2012 harvest when early-harvested corn was fed prior to the end of the 2011 marketing year. That caused estimates to be revised and questioned for the 2011 and 2012 crops. Some of that was offset by reductions in projected estimates of exports, says Wisner. USDA has projected a higher-than-average volume of corn being fed during the first quarter of the year due to increased livestock numbers, heavier market weights and substantial marketings.
But at the same time, feed alternatives are also in short supply, including corn from the 2012 second crop in Brazil and feed quality wheat from a variety of sources. Those may extend the ability of U.S. corn to meet export demand. But Wisner is not convinced of that. He says the main alternative to the short U.S. 2012 corn crop will be the 2013 second crop corn soon to be planted in Brazil. There is always the logistical challenge of getting it here, or anywhere for that matter.
With high use of domestic stocks in the first quarter of the year, there must be reduced feeding of stocks in subsequent quarters, but how much? Wisner says the 12% increase identified in the first quarter will have to be correlated with a feed reduction in the balance of the year. But he says that means there will have to be a larger reduction in livestock numbers than is now indicated. The only choice would be a reduction in cattle on feed (and USDA just indicated January cattle on feed was only 96% of that from 2012).
Rationing for the rest of the year
Wisner expresses concern about the need for rationing corn for feed throughout the balance of the marketing year.
- If feed use is up for the second quarter, then use will have to be down 49% for the last two quarters compared to year earlier numbers, which he says has crisis implications for livestock producers and will create stress on the ethanol industry.
- If feed use is up for the second quarter by only 2%, then the feed use of corn for the balance of the marketing year will have to be down only 28% than year-earlier numbers, which would still bring stress on all corn users.
- If feed use for the second quarter is down by 9% from year earlier numbers, then there would only need to be a 15% reduction for the balance of the year, which will still mean a major challenge for all users of corn.
Wisner notes that USDA statisticians reduced their estimate of corn exports to only 950 million bushels for the current marketing year in the Jan. 11 supply-demand report, which would be the least in 40 years, and would mean a 36% cut from 2011. And he says if the estimate falls short of the 950 million, more corn would be available for domestic use.
To date, exports are about 50% below prior year levels, and the 539 million bushels exported by early January would put the year total at 749 million bushels if the pace was retained. With lower exports and more available for feed, Wisner’s feed use scenarios would not be as stressful. He says the need for rationing would not be negated, but the feed reductions would be more modest.
But will exports continue to languish? Wisner says reaching the USDA projection would only require 411 million more bushels to be exported between now and the end of August. Based on the past year’s export pace for the balance of the marketing year, the export pace would need to slow by nearly 16%.
U.S. corn exporters have been facing stiff competition from feed wheat in several countries along with corn from the Ukraine and second-crop corn in Brazil that has been priced under the U.S. corn market. Those supplies will not last, and many have already diminished to the point that foreign exporters have closed down. Southern Hemisphere feed wheat, just now being harvested, is down about 25% in yield in production, and the European Union is expected to be in the market buying substantially more feed grains than usual. However, the EU will not buy U.S. corn to avoid biotech issues.
Wisner concludes by saying the short corn crop has already reduced ethanol and export use of U.S. corn, but not feed use, despite higher prices. And he says without that, corn supplies could be tighter than already indicated. He will be watching for the next quarterly grain stocks report at the end of March, along with livestock inventory, and marketing weights to determine if the second quarter corn disappearance confirms any change in the trend from the first quarter.
He says export demand has been weak and if the global market wants Brazilian corn it will have to sort it out from all of the Brazilian soybeans headed to export terminals, which he perceives as an increased demand for U.S. corn to be exported. The two issues that will have a bearing on demand, says Wisner, are the export price of alternative feeds and the potential for any shipping delays. While the latter is unknown, the former points to corn as a bargain:
- $340 for Australian wheat
- $340 for French wheat
- $310 for U.S. soft wheat
- $305 for U.S. corn
Corn stocks will be tight before the end of the current marketing year, causing spot shortages. U.S. livestock feeding has been aggressive in light of short feed supplies, and unless there are cuts in the rate of feeding, livestock feeders will face critical decisions. Exports have been cut back due to high prices, but with the disappearance of alternative feed grains, U.S. corn exports could resume by the end of the marketing year, putting more pressure on the supply.