Focus on United States

by Meyer Sosland
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Government subsidies to support purportedly strategic industries often have unforeseen consequences. Thus, the intensifying food-for-fuel debate in the United States (U.S.) should come as no big surprise. It is increasingly argued by some observers that the ethanol mandates and subsidies in the Energy Policy Act of 2005 have had the unintended effect of tying the price of a bushel of maize (corn) in the U.S. to that of a barrel of crude oil.

Since world maize prices largely depend on U.S. prices, many believe the U.S. government-subsidized boom in ethanol is helping to drive up food prices, not just in the U.S. but also in the poorest countries of the world. The 51¢-pergallon tax credit (14¢ per liter) on ethanol fuel was a key part of a series of measures to further U.S. energy inde-Canada pendence proposed by the Bush Administration and passed by Congress.

The 121 ethanol plants operating in the U.S. will consume 57 million tonnes (2.2 billion bushels) of maize in the 2006-07 crop marketing year (Sept. 1 to Aug. 31) to produce 23 million tonnes (6 bil-Alaska Hawaii lion gallons) of ethanol. That will amount to 18% of the maize crop, but just 4% of total U.S. fuel consumption. Expansion of existing plants plus the addition of 75 ethanol plants now under construction will raise America’s ethanol capacity to over 12.5 billion gallons, according to the Renewable Fuels Association. The maize needed to fill this capacity will be 110 million tonnes or about 40% of current crop levels.

U.S. farmers have responded by planting 36 million ha (90 million acres) of maize, up from 32 million ha (78 million acres) in 2006. This was mostly at the expense of soybean plantings, which declined 11% to 27 million ha. With maize futures on the Chicago Board of Trade hovering at U.S.$4 per bushel, for now at least, the market is dictating an even greater increase in maize planted area for coming years.

Abundant arable land and high productivity have long made the U.S. the world’s leading agricultural exporter, but

some fear ethanol has the potential to diminish that status. Despite a 30-year decline in total planted area, the U.S. has been the biggest international wheat supplier for decades. Exports in the 2007 marketing year (ended May 31, 2007) were 27 million tonnes, or about 46% of the total crop and 25% of world trade. However, 20 years ago U.S. wheat exports of 40 million tonnes accounted for almost 40% of the wheat in world trade.

It has been only in the last few years that the U.S. ceased to be the largest exporter of soybeans, yielding its position to Brazil, though in total soy complex (beans, meal and oil) exports the U.S. was passed by both Brazil and Argentina several years ago.

But it is in maize where U.S. production has long dominated world markets. In 2006, U.S. maize exports were 55 million tonnes. That was 20% of the U.S. crop, but two-thirds of world maize trade. According to the USDA, U.S. maize production in 2006-07 is expected to increase by 18%, but exports are forecast to decline by 9% over the previous year due to diversion from export markets to domestic ethanol production. These trends will likely accelerate. With meat consumption rising in developing countries, albeit more slowly now due to higher feed costs, the global maize trade will continue to increase, further shrinking the U.S. share.

One recent study by Iowa State University’s Center for Agriculture and Rural Development makes some startling projections about the potential for an ethanol driven decline in U.S. agricultural trade over the next 10 years. The extreme scenario assumes oil prices at $65 to $70 per barrel ($10 over U.S. Department of Energy forecasts), and sufficient flex-fuel cars to consume all ethanol produced. This oil price would sustain a per bushel maize price of $4.40 ($173 per tonne) and make feasible the production of 30 billion gallons of ethanol, enough to consume nearly all of the U.S. current maize production and approaching the 35-billion-gallon ethanol goal declared by President Bush in a speech earlier this year.

The study says the result by 2016 would be a 45% drop in maize exports even as maize area expanded 25% to 45 million ha (112 million acres). Soybean area would shrink from 30 million ha (73 million acres) to 21 million ha (53 million acres), and exports would drop by 46% from current levels. The contraction in wheat area would accelerate and exports would plummet to 13 million tonnes (483 million bushels), roughly half the current level, the study said.

The study’s more conservative baseline scenario, which supposes lower oil prices, maize at $3.40 per bushel, and 15 billion gallons of annual ethanol production, forecasts much smaller declines. (For more on the study, see article on page 52 of the July 2007 issue of World Grain.)

On the plus side of the trade equation, the rise of ethanol has given new prominence to its by-product, dried distillers’ grains and solubles (DDGS), as a feed component. About one-third of maize used in ethanol remains as DDGS, and as feed millers worldwide become better educated about its merits, DDGS exports will help offset some of the loss in maize shipments. DDGS exports will already reach 1.2 million tonnes in 2006-07 despite being barred from Europe over a GMO dispute, which could be resolved soon.

The enormous and diverse U.S. feed industry is going through a period of adjustment due to the ethanol boom. Having to pay more for maize, its main feed ingredient, is just one aspect. Another is the opportunity or need to substitute DDGS for maize in feed rations. Beef and hog production could be shifted closer to ethanol plants to avoid costly drying and transport of distillers’ grains.

Compound feed production in the U.S. is split fairly evenly between integrators (companies that own their livestock), and commercial producers. They account for 46% and 54%, respectively, of the 122 million tonnes of primary (mixed once) feed production in 2006. Output in the U.S. has increased an average of 1% to 2% per year over the last decade. Land O’Lakes, with 75 plants, and Cargill are the biggest players on the commercial side. Among integrators, Tyson Foods and Pilgrim’s Pride are the largest feed manufacturers. Total U.S. feed consumption by livestock is over 220 million tonnes.

The U.S. flour milling industry has 65,000 tonnes (1.4 million cwts) of daily grinding capacity, with rate of grind averaging 87.4% of six-day capacity in 2006, up from 86.2% the year before.

Utilization fell during the early part of this decade as per capita flour consumption in the U.S. declined. Wheat flour demand has now stabilized and recovered somewhat with the end of the low-carbohydrate diet craze, but higher wheat prices will put pressure on margins, and could accelerate the continuing long-term consolidation of the industry. Cargill, ADM and ConAgra are the dominant flour milling companies, accounting for nearly 60% of total U.S. production capacity.

Although a prolific flour producer, the U.S. is not among the world’s top exporters. U.S. shipments in 2006-07 are forecast by the International Grains Council at 300,000 tonnes, or 4.8 million cwts, the same as in 2005-06 but dramatically lower than the recent high of 931,000 tonnes in 2000-01. In 2006-07, the U.S. is forecast to import roughly the same amount of flour that it exports.

While overall flour production in the U.S. is relatively stable, there has been growth in recent years in whole wheat flour output. In a survey of 19 of the largest U.S. milling companies, Milling & Baking News, sister publication of World Grain, estimated that whole wheat flour production in 2005-06 (12,386,000 cwts) increased by 26% over the year before. The expansion seems to confirm assessments of whole wheat advocates that whole wheat products are rapidly capturing the buying focus of consumers, as well as being offered in increasing volume by manufacturers of grain-based consumer foods. WG

David McKee is a grain industry consultant providing market research and other services to companies seeking to initiate business in new markets. He can be reached by e-mail at