Corn supply shrinks to 16-year low ethanol to blame
Demand for corn for ethanol and other uses has shrunk surplus stocks in elevators and farmers' bins to the lowest levels since 1995, the U.S. Department of Agriculture said Wednesday.
That surplus amounts to an 18-day supply of corn ready for immediate use, compared with more than 40 days a year ago.
As a result, corn prices have doubled from $3.50 last June. Food makers, meatpackers and restaurants have already warned that consumers will pay higher prices as a result.
For Iowa's economy, the surge in prices for corn and soybeans has added an extra $7 billion in cash above the $13 billion farmers received for their corn and soybeans a year ago.
The USDA's monthly supply and demand report issued Wednesday morning increased its demand forecast for corn for ethanol by 50 million bushels, to 4.95 billion bushels this year.
The use of corn for ethanol has risen about 33 percent since 2008 and will consume almost 40 percent of the 12.4 billion bushels of corn produced in the United States last year.
In Iowa, ethanol is expected to consume an even higher percentage of the state's corn - up to 60 percent - because of the 41 plants in the nation's leading ethanol-producing state.
The surge in demand for corn as an ethanol feedstock and higher commodity and supermarket prices are likely to revive the food vs. fuel debate that began in 2008 when corn prices briefly exceeded $7 per bushel before falling back.
Anticipating such criticism, the Renewable Fuels Association said in a statement: "Many will use strong ethanol demand as the rationale to drive the price of corn futures as high as the market will bear. In turn, this will likely cause ill-informed industries and talking heads to pronounce U.S. ethanol production as the root cause of food inflation the world over."
Corn-based agriculture also is bracing for criticisms that have come from overseas, where rising food prices have generated warnings from the United Nations and other organizations of increased hunger and political instability.
Beyond the extra demand for ethanol, the USDA report showed that a variety of factors contributed to the decline in reserve corn stocks from just under 1.8 billion bushels last May to 675 million bushels this month.
- A drop in the U.S. corn harvest from 13.1 billion bushels in the 2009 crop to 12.4 billion bushels taken from the fields last October. Heavy rains in July cut into yields in Iowa and Illinois, the nation's No. 1 and No. 2 corn-producing states.
- Increased use of corn for seed and food (particularly for corn sweetener exports to Mexico) from the projected 5.9 billion bushels last May to 6.2 billion bushels this month.
- A 60 million bushel increase in the amount used for feed, despite a reduction in U.S. livestock herds, as producers pushed their animals to full packinghouse weights as quickly as possible to take advantage of rising prices.
- A 434 million bushel increase in exports from the current crop, stimulated largely by crop shortfalls in Russia and Ukraine and expected smaller crops in Argentina.
The report is likely to continue upward momentum for corn prices unless farmers increase their corn acreage by at least 5 million acres from the 88 million they planted last year.
On Wednesday, the front-end March contract for corn closed up 24 cents per bushel at $6.98. The May and July contracts rose to $7.09 and $7.13 per bushel, respectively.
Don Roose of US Commodities in West Des Moines said the USDA report "is a loud and clear signal that we haven't slowed (corn) usage. At some point, we'll have to reach price levels to slow down demand."
Analyst Arlan Suderman of Farm Futures Magazine noted that the soybean price of $14.50 per bushel is what is considered a low 2.27 times the price of corn. That "adds further risk to corn's ability to get the 93 million acres it needs for the approaching growing season," he said.
Suderman noted other questions hanging over the markets, including the prospect of a short crop in Argentina and the continued possibility of purchases by China.
"Get ready for a wild ride through the growing season, with large price swings likely," he said. "Our greatest risk would be a return of fear in the financial markets that would cause money managers to step to the sideline."
Higher prices are expected to bolster demand for farm equipment, whose production plants make up the largest segment of Iowa's manufacturing base. Shares of Deere & Co., Iowa's largest manufacturing employer, have doubled in the past 12 months on such expectations.
Livestock producers responded to the high feed costs of 2007-08 by reducing their herds, which helped cattle and hog producers to profits last year for the first time since 2007.
But the 25 percent rise in cattle and hog prices since November caused the chief executive officer of meatpacker Tyson Foods to echo other predictions by government agencies and warn of "meat inflation" for consumers later this year.
Ethanol producers, who enjoyed strong profits in mid-2010 when corn prices were below $4 per bushel, now are running in the red again with higher corn prices.
For farmers, the higher prices raise the possibility of more cash income but also increase problems, according to Mike Brelsford, who farms about 5,000 acres near Perry.
"The public sees those high futures prices, but we don't necessarily capture them," said Brelsford. "What happens is that Monsanto and the other seed companies and the oil companies also see the report, and prices just go up. Landlords raise their rents, and when it's over we aren't necessarily any better off."
Brelsford said he fertilized his fields last fall on the assumption that he would do a 50-50 split between corn and soybeans.
"A report like this makes you re-evaluate," he said.