Ethanol production, feed consumption are having a big impact on the market
Current consumption of U.S. corn and soybeans is a great deal higher than industry analysts expected, according to Tim Brusnahan, vice president of Brock and Associates, speaking at the recent WATT Online Animal Forum: Feeding the Globe. The production of ethanol, together with several other factors, appears to be at the heart of current fluctuations in the feed ingredients market and as a result, in the livestock markets as well.
Planting intentions for 2011
Referencing the recently released USDA report on 2011 planting intentions, Brusnahan noted that of the eight major crops there was an overall increase of 8.6 million acres planted versus last year. Corn plantings came in at 92.2 million acres versus a pre-trade estimate of 91.8 million acres. On the soybean side, acreage expected came in slightly less than the pre-trade market had planned on, and wheat as a whole came in slightly higher, with the exception of durum wheat which came in slightly lower.
USDA grain stocks report
The recent USDA grain stocks report was also cause for a good deal of concern in the industry. As of March 1 the amount of corn remaining in the U.S. from last year’s harvest is 6.52 billion bushels. This is 1.2 billion bushels behind last year and below pre-trade estimates of 6.69 billion bushels. In addition, soybeans are at 1.248 billion bushels, which is 22 million bushels less than last year and below pre-trade estimates of 1.3 billion bushels. Consumption of corn was at an all-time high this past quarter and soybean consumption was near an all-time high.
Corn futures prices are currently around $7.00 in the nearby contract, which is representative of the 2010 crop year. This is far above the $5.50 to $6.00 level which is a more typical value for the stock. As a result, based on the current market conditions, Brusnahan’s firm is predicting that crop prices for corn will continue to be volatile for another year and a half.
Brusnahan noted that the current stock-to-usage ratio for corn is at 5% as a result of ethanol production and feed consumption. A 5% usage ratio is, when one looks back as far as 1926, close to one of its lowest points. This low usage ratio is causing worldwide concern. Brusnahan noted that getting back to a usage rate above the 20% range is highly unlikely. He said he believed that a ratio in the 10% range was far more possible if farmers can get in a really good crop this year.
Corn quality for the production of ethanol was very strong in the second half of 2010, which resulted in a close correlation between corn and ethanol prices. Profitability for ethanol producers has been very good in the last six months, and the ethanol industry is running at almost 100% capacity.
Exports have also become an important part of the ethanol equation. Demand from the European Union has been strong. Demand from Brazil has been particularly strong because sugar prices there have become too high. In addition, demand for DDGS is increasing. Some DDGS is being exported, though the majority of it is being consumed in the U.S. It should be noted that there was a brief spike in demand for DDGS from China in mid-2010, but that has currently tapered off. In addition, U.S. pork producers are beginning to use DDGS because of the high price of corn.
Global supply and demand
Brusnahan noted that while the supply of corn worldwide has tightened, we are in no way running out. Globally, we have a 15% stock-to-usage ratio. He did point out that since the U.S. is the primary producer of corn, if U.S. production declines it will have a global impact. He also noted that while China’s imports and exports have been inactive the last few years, their corn supplies are low. He said if the U.S. were to have a particularly good corn crop it would not be a surprise to see China import some of it.
World soybean demand has been relatively stable, when taken as a whole. Soybean exports have been running steady, with the majority going to China.
Supplies of wheat look fairly good. U.S. supplies are “fairly adequate,” and globally there will most likely be some improvement, as it is unlikely that the U.S., Canada, Europe and Russia will all have a bad crop year at the same time.
The livestock industry has had a difficult challenge over the last four years in the U.S., and many markets have adjusted as a result of the higher cost of feed, Brusnahan observed. Right now pork and beef seem to be doing the best, and the poultry and dairy industries seem to be having a more difficult time. There are 9.2 million dairy cows in the U.S., and a large percentage of those facilities are totally dependent on buying feed for milk production, particularly in western states where producers are unable to offset feed costs by growing the crops themselves.
Pricewise, cattle and swine production have been doing the best. The egg industry has been volatile for a number of reasons. Pork supplies are, for the most part, stable. Per capita meat consumption has also been fairly stable. After experiencing a drop in consumption, the poultry industry is beginning to see more consumption, largely because of higher prices for pork and beef.
Pork exports have been “phenomenal,” Brusnahan said, and this is fueling the current high prices for pork. Exports to China and Japan have been a huge benefit for U.S. pork producers as pork is a major meat protein for China, and China consumes approximately half of all pork produced in the world. This is also helping drive the demand for U.S. soybeans as a feed source for pork.
Right now beef inventory is low, but beef margins have been relatively good. This has helped dairy producers; as they cull their herds they are able to return a favorable cash flow to their operations as they replace their dairy cows with fresh heifers. However, Brusnahan noted that cattle and cow calf producers nationwide have been facing a difficult decision in whether to use existing acreage for crops or for pasture, given the high price of corn. This could be in part what is fueling high beef prices.
While the broiler market has recovered, it is not highly profitable, and most returns in January and February were negative. Going forward there should be improvement in March’s numbers for most U.S. poultry companies. Within the global arena the U.S. is a large consumer of broilers, so this has helped stabilize the overall sector. Russia has recently begun importing fewer U.S. broilers, and while this does not appear to be having a significant impact at this point, it is definitely an area of concern for U.S. producers.
Corn and soybean March 1 stocks numbers were lower than industry analysts expected. The first statistical data point for 2011 corn supplies was dramatically bullish, which means that not enough acres were planted. Since July 2010 there is no evidence to date of supply rationing, and corn and soybean prices will now likely stay strong into late June/early July.