21 May 2008

4 minute read

North America

Tight Corn Stocks and High Corn Prices On Tap

USDA released its monthly World Agricultural Supply and Demand Estimates (WASDE) on May 8th. The report contained USDA’s first estimates of the supply-demand balance sheet for the 2008 corn crop. Several key factors emerged on the report.

First, using USDA’s planting intentions of 86 million acres and a trend yield adjusted downward to 153.9 bu./acre to reflect this year’s slow planting pace, corn production is expected to hit 12.1 billion bushels, the second largest corn crop on record. Still, that’s nearly a billion bushels below a year earlier. The smaller corn crop, combined with record large usage of corn for food, alcohol and industrial uses, means that corn ending stocks in the summer of 2009, before the harvest of the 2009 crop begins, will be extraordinarily tight. The corn balance sheet released by USDA suggests that ending stocks at the end of the 2008 marketing year will be near 6% of total corn usage. This is appreciably tighter than this year as USDA anticipates that the corn carryover late this summer, before harvest of the 2008 crop begins, will be near 11% of total usage. USDA boosted its estimate of the national average corn price during the 2008 crop year to $5.50 bushel, but if their balance sheet estimates turn out to be correct, the actual season average price is likely to be even higher than their record high forecast.

The second chart below reveals the dramatic change in corn usage over time. During most of the 1990s corn devoted to food, alcohol and other industrial usages (primarily high fructose corn syrup production) totaled less than 20% of corn production. During the first half of this decade, increasing ethanol production pushed usage in this category up to about 25% of production and in both 2006 and 2007 approximately one-third of U.S corn production was devoted to food, alcohol and industrial corn uses. USDA forecasts that corn devoted to ethanol production during the 2008 marketing year will be near 4 billion bushels. If that’s the case, and assuming corn production equals 12.1 billion bushels, a record high 44% of U.S. corn production during 2008 will be devoted to food, alcohol and industrial uses of corn.

The third chart clarifies even more just how much corn usage has changed in a very short span of time. Historically, corn used to feed livestock has been the single largest usage category for corn. But that is on the verge of changing. As recently as 2002, corn devoted to ethanol production totaled just 11% of U.S. corn production, whereas 62% of the U.S. corn crop was used to feed livestock. As ethanol production ramped up in recent years, however, ethanol’s share of total corn consumption increased dramatically and is poised to surpass feed usage sometime in the next few years. For example, based on USDA’s balance sheet estimates, usage of corn for ethanol could total 33% of 2008 corn production whereas feed consumption’s share of total usage is likely to decline again to less than 45% of the total. And it’s not hard to envision a time in the near future when corn used to produce ethanol becomes the number one corn usage category.

The Markets

Slaughter cattle prices in Kansas the week ending May 9 strengthened nearly $2/cwt. from a week earlier, whereas dressed weight prices in Nebraska changed little. Preliminary estimates of slaughter cattle prices for the week ending May 16 suggested prices were near a week earlier on light volume. Choice boxed beef prices continue to hang in the mid-$150s, although the Choice-Select spread continues to improve, climbing above $4/cwt. the week ending May 16. Feeder cattle prices remained surprisingly strong, given losses most cattle feeders are experiencing on current marketings and high feeding costs of gain.