Keeping a close eye on corn

by Arvin Donley
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Among the various types of grain traded in the global market, corn (maize) is “king” because of the influence it wields over the price of other agricultural commodities, said Bill Lapp, president of Advanced Economic Solutions, Omaha, Nebraska, U.S.

“When corn sneezes, the other food commodities catch a cold,” he noted during his presentation on the global economy and markets at Sosland Publishing’s 34th annual Purchasing Seminar June 6 at the Intercontinental Hotel in Kansas City, Missouri, U.S.

Companies who purchase corn, wheat and other grains are watching closely to see whether the U.S. can produce a large enough crop to calm what has been a historically volatile corn market in 2011.

In early June, the price of corn reached an all-time high of $7.99 on the Chicago Board of Trade, and a June 10 U.S. Department of Agriculture (USDA) report indicated there wasn’t any relief in sight. A wet, cold spring delayed fieldwork in parts of the Midwestern U.S., prompting the USDA to cut estimated corn plantings 1.6% from a previous forecast, to 90.7 million acres. The USDA slashed its forecast for corn stockpiles near the end of the 2012 summer by 23% from an earlier projection. Supplies are already expected to reach a 15-year low at the end of this summer.

In addition to weather-related supply issues in the U.S., Lapp said there were three other major factors driving up the price of corn and other grain commodities: the weakening of the U.S. dollar; strong economic growth in developing countries, particularly China, which has led to increased food consumption; and the ongoing impact of the ethanol industry’s insatiable demand for corn.

Lapp said he doesn’t believe speculators in the agricultural commodities markets have had as big an impact on prices as some other analysts.

Since 2002, the value of the U.S. dollar has declined by about one-third, Lapp noted. “The weaker dollar has meant stronger commodity prices,” he said. “We first saw it in crude oil and then we started to see it in the agricultural commodities.”

But just as important has been the remarkable economic growth in China and other developing countries. Lapp noted that from 2000 to 2011, China’s GDP growth (on a real average annual percentage basis) has been almost 10%, while the rest of the developing world has been more than 6%. Meanwhile, the average GDP growth rate during that period for the U.S. and other advanced economies has been around 2%.

Lapp said Chinese meat consumption has risen 23% since 2000, which has meant skyrocketing demand for soybean meal, mainly from South America. That trend is expected to continue for the foreseeable future, meaning the call for more oilseed acres will probably come at the expense of other crops, he said.

The question regarding China that doesn’t appear to have a clear answer at this point is: Will it eventually import significant quantities of U.S. corn?

“That still underlies my thinking on why our downside may be limited in corn prices, because at some point I think they’re going to want to build a reserve,” Lapp said.

The other issue causing significant upward pressure on prices, Lapp said, perhaps to a lesser extent than the weak dollar and growing food demand in developing countries, is the biofuels industry.

Over the past decade, 46% of growth in demand for coarse grains has come from ethanol.

“So if you take China’s 17 percent increase in coarse grains and another 46 percent in biofuels, the other 5 billion people can take whatever scraps are left to feed their people,” Lapp said.

The good news for non-biofuels companies that purchase corn, he said, is that the U.S. mandate for ethanol production will soon level off. The mandate, which began at 4 billion gallons in the early 2000s and is currently at 12.6 billion, is only scheduled to increase by 2.4 billion gallons over the next decade, peaking at 15 billion in 2022.

“It’s late in the game, in my view, in terms of ethanol,” Lapp said. “We’re near the end of the ethanol boom and that’s been almost half of the total growth and demand.”

Lapp closed his presentation by showing a chart dating back to 1866 that highlighted the various price plateaus that had occurred in the corn market, the most recent running from roughly the mid-1970s through the mid-2000s.

“We went through a period of roughly 30 years and then the world started to change,” Lapp said. “The dollar weakened sharply, China comes onto the scene, we get a few serious weather events and suddenly prices are propelled to a new level. We have a limited clue of what that new level is going to be. The truth of the matter is we are not going back to lower prices. Where we end up is a question mark.”

Feed wheat in greater demand

If corn prices remain at historical highs, the cattle, poultry and pork industries may look more to feed wheat and millfeed to meet its needs.

Globally, wheat supplies for the 2011-12 season are expected to be 1% higher, with lower U.S. production being offset by a 25.9-million-tonne growth in other parts of the world, according to the June USDA report. Wheat reserved for food use is projected at 945 million bushels, up from 15 million in 2010-11, while wheat for feed and residual use is estimated to grow to 220 million bushels, up 50 million from the previous year.

Steve Freed, vice-president of Research for ADM Investor Services, Inc., provided an overview of the world wheat situation at the purchasing seminar. He said, assuming there are no further significant weather events in the world’s major wheat growing regions, prices may trend lower toward the end of the year based in part on the decision by Russia to resume exporting wheat and the potential for export demand to decline slightly from a year ago.

“The key is Russia,” he said. “Right now the USDA expects Russia to have a 53-million-tonne crop, and they think it will have 10 million tonnes extra to export versus 4 million tonnes last year.”

But there’s a great potential for extreme volatility within the individual wheat classes due to the lost spring wheat acres in Canada and the northern U.S. because of an overabundance of moisture, drought in parts of the hard red winter wheat growing section of the southern plains and disastrous planting and growing conditions in the primary durum wheat growing areas in Europe and Canada.

“I don’t think I’ve ever seen the by-class wheat situation as volatile as it is now,” Freed said. “You have to have coverage, particularly in spring wheat and hard red winter wheat.”

He said durum was particularly problematic. Prices in June were at $14.50 per bushel and will, in all likelihood, move higher over the next several months, he said.

“At best, we’re looking at a 70-million-bushel crop,” he said. “Last year it was closer to 100 million bushels.”

As is the case with most other grains and oilseeds, wheat appears to have moved into a higher price range plateau. Over the last five years, the lower end of the wheat price range has moved higher and prices have spent more time in the $7 to $9 dollar range in the Chicago futures market, Freed said.

He said with wheat acreage likely to continue its decline, particularly in the U.S., and the prospects of gaining significant yield improvement through biotech developments still years away, it doesn’t appear that wheat will get a supply-side boost anytime soon. Couple that with the steady growth in demand that is expected and it’s difficult to envision a significant slide in the price of wheat over the next few years.