Global production of corn has not kept pace with off-take for the past five years. As a result, ending stocks have been drawn down in each of the last five years.
“The stocks-to-use ratio now is at the lowest level since 1995, and at just about one-half of the 2000 crop level,” says George Shumaker, University of Georgia Extension economist. “Increased demand from China has had a major impact on use while relatively short U.S. crops in recent years along with drought in Europe this year have contributed to the short supply.”
The U.S. supply/demand situation also is tight, he adds. According to the September USDA crop production report, U.S. farmers planted the same acreage to corn this year as last year — 79.1 million acres — but they're projected to harvest 2.6 million acres more than last year. Improved growing conditions this year vs. last year in the Eastern Corn Belt, South and Mid-South will account for most of the additional harvested acres, says Shumaker.
U.S. national average corn yields are projected to be 138.5 bushels per acre. If these yields do occur, they would be just off the record of 138.6 bushels per acre set in 1994.
“The high yields are due generally to good weather across much of the Corn Belt and excellent grain-growing weather in the Southeast and Mid-South, with several states in the latter areas setting new yield records,” says Shumaker.
Areas with less than ideal conditions lay to the west of the Mississippi River where hot and dry conditions may trim yields.
“An interesting phenomenon exists this year with respect to yields,” says the economist. “Even though we are flirting with national average yields at near-record levels, it is possible that this year we actually could see yields falling below the trend line for the second consecutive year. That last happened in 1975 and 1976. But in the years since, we have not seen yields fall below the trend line for two consecutive years.”
Beginning stocks as of Sept. 1, 2003, were just about 1 billion bushels — the lowest amount since 1996, says Shumaker. “We ended last year with a stocks-to-use ratio of 10.5 percent, also the tightest since 1996. Production this year currently is projected to be near 9.94 billion bushels, up 936 million bushels compared to last year but just under the record of 10.1 billion bushels produced in 1994.
“The 9.94 billion bushels to be harvested this year exceeds use during the past marketing year and should allow for expansion of off-take this year.”
The September USDA corn supply and demand report projects total off-take to be record-large at 9.9 billion bushels. USDA is predicting a drop in feed use from 5.7 billion bushels to 5.625 billion bushels due to an expected decline in grain-consuming animal units.
“While there is likely to be modest gains in both the poultry and hog sectors, these gains will not make up for the expected drop in the fed cattle numbers. As of Aug. 1, 2003, the cattle on feed number was down about 5 percent from last year and down 12 percent compared to two years ago when the record was set for feed use.”
The loss in feed use, says Shumaker, will be more than offset by gains in both exports and the domestic food/seed/industrial sectors. The current USDA projection is for a 200-million bushel increase to 1.8 billion bushels in export sales compared to last year. Japan is the United State's largest customer for corn and likely will buy more this year than last year. Mexico, especially since NAFTA, is the second best buyer and also is projected to buy more this year.
“Competition for exports comes from Argentina and China, and the current estimates are that they'll both have smaller crops this year and may not export as much as previously believed. The dollar also is weaker this year against most foreign currencies, and that makes U.S. corn a bargain compared to some sellers.”
The GMO issue still needs to be addressed, says Shumaker, before the United States can return to the export levels enjoyed during the middle of the 1990s. The StarLink problem still haunts some buyers, and other nations simply haven't yet accepted GMO products as safe despite all evidence to the contrary, he says.
USDA is projecting an increase in food/seed/industrial uses of 165 million bushels, a rise of 7.1 percent if the projection holds true. Total use in this category is projected to be 2.475 billion bushels. It appears this major-use category clearly has surpassed exports as the second most important market for corn. Last year, use in this category rose by 256 million bushels, with the largest share of that going to ethanol production.
“Several ethanol plants have come on line in the past two years with more yet to be completed. Existing plants also have expanded capacity. Increased energy costs and a strong drive to increase domestic production of all fuel sources are supporting factors.
“A total of 1 billion bushels of corn — more than 10 percent of production — will be converted to ethanol during the current marketing year.”
Total off-take will be a record 9.9 billion bushels if the USDA projections hold true. “The implicit assumption is that the higher prices generated by this demand will not choke off potential use. Time will tell whether or not this is true.”
At the end of the marketing year, says Shumaker, it appears stocks will be very close to where they started the year — at about 1 billion bushels. “I like to use the stocks-to-use ratio as a way of looking at the relationship between stocks and prices. Given that there will be a very small change in the ratio 10.8 percent for this year versus 10.5 last year, we can conclude that the season-average price this year should be very similar to last year.
“USDA makes price projections by giving a range of potential price outcomes. Their range for this year is from $2.10 to $2.50. The mid-point of that range — $2.30 — might be considered the price closest to the likely season average. Last year's season-average price was $2.30.”
Over the past few years, says Shumaker, there has been a decline in the relative importance of stocks as a season-average price determinant.
“My feeling is that the emergence of corn production in other countries has made the U.S. stocks position less important in price determination than it once was. That is not to say this relationship isn't important. It's just less important than in previous years.
“It appears we finally have moved out of the sub-$2 price range that we were in from 1998 through 2001. During that period, supply and demand were pretty much in balance as production averaged 9.653 billion bushels while total use averaged 9.671 billion bushels.
“The average production last year and this year is 9.475 billion bushels while total use will average 9.755 billion bushels. We can conclude from this that only a small change in either supply or demand can have a pretty significant impact on price.”
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