Brusnahan said that corn could go below $5 per bushel if economic growth is really low and demand drops for gasoline which will hurt ethanol demand.
Back-to-back harvests with below trend line yields for corn have buyers wondering if 2012 will bring any reduction from the record-high average corn price the U.S. experienced in 2011. Poultry and egg producers may get some relief in 2012 as feed ingredient prices fall slightly from 2011 levels—at least that seemed to be the consensus of the presenters at USPOULTRY’s Grain Forecast and Economic Outlook Conference held recently in Atlanta.
Grain prices, particularly corn prices, are strongly influenced by the price of oil because of biofuels policies in the U.S. and the EU. Dr. Paul Aho, economist, Poultry Perspective, said that in 2012 we can expect somewhat lower grain and energy prices than what the industry endured in 2011. He said that 2011 would finish with the highest ever average oil and corn prices, around $95 per barrel and $6.50 per bushel, respectively. Aho predicts corn will move towards an average of around $5 per bushel over the next two years as oil falls to around $75 per barrel.
The USDA’s November 2011 World Agricultural Supply and Demand Estimates report predicts a farm price of $6.20-7.20 per bushel for corn in the 2011-12 crop year (see Table 1). This estimate factored in the November 2011 USDA Crop Report, which pegged the 2011 average U.S. corn yield at 146.7 bushels per acre.
Tim Brusnahan, vice president of consulting, Brock Associates, said his company is projecting corn at a somewhat lower price than the USDA: $5.75-6.50 per bushel for 2011-12 crop year, and $5.25-6.25 in 2012-13. He said that corn could go below $5 per bushel if economic growth is really low and demand drops for gasoline, which will hurt ethanol demand. In addition, he said that what happens with the EU economy and DDGS exports to China could also have an impact.
The second consecutive year of below trend-line corn yield in the U.S. concerned Edward Ebert, director of economic research, Bunge North America. Ebert said that while the weather in the U.S. Corn Belt wasn’t great this past summer, it wasn’t really that bad either. “I would argue that it was hot and it didn’t get cool at night and that impacts pollination, but when we look at really challenging weather conditions, we didn’t have them this year,” Ebert said. He raised the unanswered question: if the weather wasn’t the total cause of yields that were below expectations, what does that mean for future yields? Is the yield curve for corn going to increase at a slower rate?
Demand for corn grows
More corn goes into ethanol production in the U.S. than is used to feed livestock and poultry in this country. Corn used to make ethanol now exceeds the amount of corn traded worldwide. Ebert said that grain trade really is global now. “There are people overseas bidding for U.S. grain that have money now, and they didn’t before,” he said. Increased demand for corn in other countries creates upward pressure on the corn price, even if U.S. exports of corn actually decline somewhat in quantity.
One bit of good news for corn buyers is that increased demand has triggered the expected response from farmers around the globe. “Farmers worldwide are responding to high prices by planting more acres,” Ebert said.
Some of the upward pressure on the corn price in recent years was the result of investors becoming more active in commodity markets, according to Brusnahan. “Money from the tech bubble went into commodities in index funds,” he said. “Wall Street has sold investors on the idea that commodities are an asset class. Introduction of index funds for commodities brought new money into the commodities markets.”
Brusnahan said that the bull market for corn started in 2006, and that since 2006, large speculators have not been short corn and they are still long on corn now.
Basis high in 2011
Throughout the country, basis on corn reached record high levels in 2011, according to Brusnahan. He said that Iowa used to be the residual corn supplier for the country, but now very little corn leaves Iowa because of ethanol. “Half of the Iowa corn crop is used for ethanol production and the rest goes into animal feed,” he said. “Basis really spiked in the fall of 2011. Areas that usually have surplus corn are now pulling corn in for ethanol. California’s basis for corn is running at $1-1.5 per bushel.”
There is more movement of corn than ever. Brusnahan said that in the future, basis will compress, low basis will be higher and high basis will be lower than they have been in the past. Some Midwest markets used to have negative basis, but now they all have basis.
Corn yields more $/acre
According to estimates from the University of Illinois extension service, the net return per acre for corn grown by Illinois farmers was double the return on soybeans in 2011 and it is expected to be again in 2012. It is likely that more acres will not be rotated from corn to soybeans in 2012. Raising corn multiple years without rotating might help to explain some of the lost yield of the last two growing seasons.
The ethanol mandate puts the full burden of supply rationing of corn on the animal feed industry, according to Brusnahan. He said that there are still very strong fundamentals for returns on corn, but not so much for soybeans. “If the general economy weakens further, corn use for ethanol production will drop somewhat,” Brusnahan said.
Ebert said, “There has been a stunning amount of change in the market in the last 5 years.”
“Crop pricing all revolves around energy prices,” Ebert said. “Corn prices are tied to oil prices, and soybeans are tied to corn. As corn has stolen acreage from other crops, energy prices have pulled up the price for all grains.” As prices have risen, price volatility has increased as well. “There is now and will be more market volatility,” he said. “There has been a stunning amount of change in the market in the last five years.”
Ethanol production in the U.S. has done more to the soybean crushing industry than just raise the price of soybeans, according to Ebert. Yeast converts the starches and sugars in corn to ethanol, concentrating the protein, oil and fiber fractions of the corn into the residual DDGS. When DDGS are incorporated into livestock and poultry rations they displace corn and soybean meal. So the growth of the corn-based ethanol industry is reducing demand for soybean meal both in the U.S. and abroad since around 25% of U.S. DDGS production is exported.
“The soybean meal price is about the cheapest it’s ever been relative to corn,” Ebert said. “Soybean meal prices are still high, but corn has gone up even more.” He said that high soy oil prices are driving the economics of crushing soybeans and making up for relatively low soybean meal prices.
Soybean prices need to climb to 2.2-2.25 times the price of corn or soybeans will loose more acreage to corn, according to Ebert. The USDA November 2011 WASDE Report predicts $11.60-13.6 per bushel for soybeans in the 2011-12 crop year, and Brock forecasts $12.00-13.75 per bushel for the same time period. “Brock estimates that soybean meal in 2011-12 will be $305-365 per ton and in 2012-2013 will be $280-360 per ton,” Brusnahan said.
Because of the value that starches and oils have in the biofuels industry, the value of protein in animal rations has dropped relative to the value of energy. The price pressure on energy in animal rations will only increase as the biofuels industry continues to grow. Ebert said that some ethanol producers have begun employing a process called backend fractionation, which removes the corn oil from DDGS and further concentrates the protein and fiber.
The oilseed crushing business in the U.S. will shrink because of the growth of corn-based ethanol production and DDGS. “It is a challenged industry in oilseeds,” Ebert said.
Biofuels consuming more fats
“There are 10 billion pounds of animal fats and grease produced in the U.S. each year, it has been rather stable,” said Mike Gilbert, product manager of fats and oils, Griffin Industries. What has changed is who uses these fats. U.S. biodiesel production consumed around 10% of all rendered fats in 2010, up from almost nothing a decade earlier. Domestic animal feed now uses around 40% of rendered fats.
Traditionally, the most important drivers for the price of rendered oils have been the prices for corn, soybean oil and palm oil, according to Gilbert. “Energy prices drive everything now. We used to be able to make a pretty good guess on fat markets based on annual trends, but we don’t even use them anymore,” he said. Now crude oil, heating oil and natural gas prices are the price drivers for rendered fats. In addition, mandates, tax credits and trade barriers all can affect rendered fat prices, so politics play a role. “It is a more complex market today,” Gilbert said.
The yellow grease price had fluctuated between $0.05-0.20 per pound for 10 years, but it went over $0.20 per pound in 2007 and it has basically stayed above that level since. The yellow grease price averaged $0.25 per pound in 2010 and over $0.40 per pound for most of 2011. Over the last two years, price of yellow grease has averaged 355% the price of corn.
In addition to biodiesel production having an impact on the price of rendered animal fats, a handful of large plants have opened up recently or will open soon that produce renewable jet fuels. Gilbert said that these plants are starting to increase demand for animal fats worldwide.
U.S. biodiesel producers expect to keep their tax credits in 2012, he said. Gilbert thinks that fat prices will stay relatively high, but there should be some weakening early in 2012. He said that with $6 per bushel corn, yellow grease should be below $0.40 per pound.
Phosphate prices remain high
Phosphate in the U.S. is still selling for over $600 per ton, down from the historic high level of $1,300 per ton reached in 2008, but way above the $150 per ton that was “normal.” Dr. Michael Rahm, vice president of market and strategic analysis, Mosaic Feed Ingredients, said that global phosphate shipments went up 80% to 90% in the last 27 years and that demand will continue to grow 2% to 2.5% per year.
Demand is being driven by increased use of fertilizer worldwide. Because of growing demand, a number of new phosphate operations have opened around the globe.
Gilbert said that China has started its own phosphate industry and now is an exporter after being a large importer. Saudi Arabia is going to start exporting from its first plants soon, and there are also plants in Morocco.
Gilbert said that feed phosphate sales by U.S. producers are down because of use of phytase, incorporation of DDGS in diets and imports.
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Gilbert said, “Energy prices drive everything now. We used to be able to make a pretty good guess on fat markets based on annual trends, but we don’t even use them anymore.”
Rahm said that worldwide demand for phosphates is expected to grow at 2-2.5% per year.
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