TRENDS IN WORLD CORN MARKET EXAMINED
The following summary of Farm Doc Daily’s May 21 article offers interesting insight into the world corn market as well as supply and demand fluctuations that will impact price.
An increase in export demand for corn is certainly one of the most realistic means to increase demand and have a positive impact on farm prices, which are now well below the cost of production.
For a background on the following summary points, read the full article here.
U.S. consumption of corn other than via ethanol has grown by little since the late 1990s. A key strategic question emerges for the U.S. corn sector: Is it time to diversify its strategy for future growth in demand?
If growth in U.S. consumption of corn more closely resembles the growth of non-ethanol consumption from 1996-2000 through 2010-2014, then U.S. acres of corn may need to decline since the increase in consumption can be met by the annual increase in U.S. corn yields. Such a situation could put sustained downward pressure on U.S. corn prices and bears watching.
Response of U.S. consumption to lower prices will depend on what acres of corn does in the rest of the world since this directly impacts U.S. exports of corn. China appears to be committed at present to increasing acres planted to corn to try to minimize the loss of domestic food security in its feed grain market. The large role played by yield in the recent increase in production in Argentina and, especially, Brazil suggests these South American countries have improved their competitive advantage relative to the U.S., making them even more of an export competitor, everything else assumed the same. If this assessment is correct, it would mean that the recent period of farm prosperity produced a result similar to that of the 1970 period of prosperity, except that the crop involved is corn now vs. soybeans in the 1970s. The previous discussion in this bullet suggests a critical question confronting the U.S. corn market specifically and the price of corn more broadly is how does corn acreage in Russia and the Ukraine change relative to the U.S.?
It is useful to put the strategic perspective of this article into the context of USDA's early forecast for the U.S.'s 2015-2016 crop year relative to the 2014-2015 crop year contained in the recent May 2015 World Agricultural Supply and Demand Estimates Report. USDA forecasts a 138 million bushel increase in total U.S. corn disappearance. Such an estimate is approximately half way between the two increases in U.S. consumption discussed above. The increase comes from an increase in exports and domestic feed and residual use. USDA forecasts a 1.4 million acre decline in harvested acres and projects a 4.2 bushel decline in harvested yield. The cumulative net impact is a 100 million decline in ending stocks. The projections with regard to consumption are clearly not unreasonable, especially given the decline that has occurred in corn prices over the last couple of years. While clearly weather and acreage decisions will have a big impact as the crop year progresses, the strategic environment discussed above will also exert its influence. As with any analysis, the strategic assessment above is uncertain. Monitoring its evolution over the next two or so years, especially in regard to U.S. consumption and corn acreage around the world, will be critical to understanding the future of corn prices and the role that U.S. corn will play in the world corn market in the coming years.