Ethanol is consuming corn at a rate that is only 10% less than that of livestock and poultry demand. And more than one bushel of corn out of three produced in the US will be converted to ethanol in the current marketing year. That is going to cause concern about the amount of corn we will produce and whether it will be enough to meet demand with minimal rationing. And that causes concern for the traders.
“Corn supplies will be tight and some rationing of demand likely will be needed in the year ahead.” And with that observation, Iowa State University marketing specialist Bob Wisner leads into the meat of his November newsletter about ethanol and how much corn it consumes.
Wisner begins by expressing concerns about the current supply, shortened by weather adversities throughout the Cornbelt during the growing season. He adds that the September 1 grain stocks report noted some uncertainty about the size of the corn crop on hand. If that is the case, he’s expecting larger than normal use by the next quarterly report. He says the spring quarter of 2010 used 36% of the grain on hand and that reflected a poor quality crop in the bin.
Much of Wisner’s latest data originated in the October Crop Report which was created from 15,000 surveys of farmers and visits to 1,920 corn fields which showed a continuation of the uptrend in population, but smaller kernels sizes. He says the latest report shows a picture of moderately tightening corn supplies for the year ahead. Carryover at the end of next August is now less than one billion bushels and Wisner says there is still uncertainty about that.
In addition to the uncertain size of the new crop is the uncertainty for demand for the old crop, particularly in feed and residual uses. He said USDA estimated feed use of the old crop at 36% above the prior crop without any large change in animal numbers. Additionally, the poor harvest conditions created field losses, USDA attempted to account for those. Test weights were lighter than normal and the increased use for feed last spring may have reflected the lower test weights and the over estimation of the size of last year’s crop. He says a 20,000 bushel bin may not have contained 20,000 bushels because of the lighter density of the corn, and the higher moisture content may have caused greater shrinkage when dried.
Feed use in the current and next marketing year may return to more normal levels, says Wisner. He notes that livestock numbers should be stable, but says five or six months of $5 corn may change that picture, as well as slower growth for ethanol demand, and that will bring only smaller increases of DDGS supplies in the next two years.
Corn exports are a more uncertain category. For the old crop the South American harvest was small and Chinese purchases of US corn were modest. However, with the poor wheat harvest, US corn exports will be shaped by global demand, but a larger South American harvest and an uncertain demand from China. Russia has halted grain exports in the wake of its production shortage and Wisner anticipates slightly higher corn exports for the year ahead than projected by USDA.
For ethanol, corn use has been expanding at a rapid rate, but the rate may slow in the coming year as the industry approaches the blending wall and the maximum 10% amount of ethanol that can be used in gasoline. He says the recent EPA decision to allow the use of E-15 in 2007 and newer cars, and a future approval for 2001 and newer cars vehicles will allow a 15% blend in 40% of the US motor fleet. However, he says the infrastructural challenges for merchandisers will be an issue and Wisner does not anticipate any immediate surge in demand. He believes corn use will increase 3.6% for ethanol refining in 2011, which follows a 22.3% increase in the marketing year just ended. Wisner says the slower rate of expansion will allow corn production to catch up to demand, and there will be a slower expansion of DDGS for feed use that substitutes for corn. He says limited profitability in the ethanol industry affects its ability to bid for corn while supplies are short, and the government mandate may become the driving force for ethanol production instead of the market.
Over the next two years, Wisner expects further ethanol expansion and with the current yield trend, more acreage will be needed in 2011 for corn production. He is expecting the winter to spring market signal the need for more acres, and he said the wheat market already made that signal for increased acreage. Wisner says the acreage battle will also impact the prices of other crops to ensure sufficient acreage. And he added, “If final corn supply-demand conditions are near those currently indicated, higher corn prices needed to attract more acreage next spring are likely to be a tempering influence of profitability of ethanol production.”
In the coming year Wisner says the shortfall from 2010 will necessitate the need for more production in 2011 and that means more acres. He is projecting an additional 3.2 million acres in 2011 corn with the help of normal yields. With low stocks until that time, Wisner expects the corn market to be volatile if weather or other problems affecting either the US or South American crops. He says a 2-3 bushel decline in the US yield next year would threaten the carryover to below working levels and that would signal a need for higher prices to reduce use and encourage another 3.5 to 4.5 million acre increase in corn.
Summary:
The relatively poor quality of the 2009 corn crop caused greater than expected use by livestock feeders, and with other global issues, additional demands are being placed on the US ability to produce enough for its own needs. Livestock demand will not grow significantly because of the cost of feed, and ethanol profitability will be an issue for that industry faced with buying $5+ corn. An additional 3.2 million acres of corn will be needed in the coming year, but depending on export demand and the South American harvest, additional acres may be required.
- Stu Ellis