An insatiable demand for corn for ethanol production combined with projected record exports is likely to drive U.S. corn stocks-to-use ratio down to 10 percent this season.
The last two times that happened, prices soared.
CBOT corn futures peaked at $5.545 per bushel in July 1996 when the stocks-to-use ratio fell to 5 percent. When the 2003/04 stocks/use ratio fell to 9.4 percent, it produced a high of $3.3525 in April 2004.
The 15-year stocks-to-use ratio average is 15 percent.
According to Dennis Morrison, trading and transportation manager for Integrated Grain and Milling, Fresno, Calif., there will be many “dramatic forces” in the grain and protein meal markets during the 2006/07 crop marketing year.
Morrison made his observations in a grain and protein meal outlook for the 25th Agribusiness Management Conference held recently in Fresno.
“Adverse global growing conditions have resulted in severe shortfalls in feed grain and wheat supplies in much of the world,” Morrison said. This means export trade in feed grains will be the highest in decades due to the lowest world ending stocks in 30 years.
On the other hand, global soybean supplies are seemingly plentiful. However, world trade in soybeans and products continue to increase, driven mainly by China's expanding economy and improving diet, Morrison noted.
The United States is harvesting its third consecutive corn crop of more than 11 billion bushels; however, the burgeoning corn ethanol industry is taking an ever increasing share of the U.S. corn production.
USDA projects 2.15 billion bushels of corn will go into producing ethanol this season. However, a private forecaster says the United States will need 2.233 billion bushels of corn to turn out 6.114 billion gallons of ethanol in 2006/07. If realized, this would be a 35 percent one-year increase in corn demand for ethanol and a 240 percent increase since 2000/01.
“If it were not for the robust corn export demand, 2006/07 may have become the first year for the U.S. to send more corn to ethanol production than export sales,” said Morrison. That distinction will likely come by 2007/08 “as new ethanol production continues to come online at breakneck speed.”
U.S. corn exports are expected to rise to levels not seen since 1990 due to foreign feed grain supply shortfalls, added Morrison.
Production of distillers grain (DDG), a byproduct of ethanol production, is also increasing. Most livestock feeders are experimenting with the use of DDG in feed rations, but its in gaining in popularity due to its nutritional value, roughly 26 percent protein and 10 percent fat.
Morrison said one private forecaster projects DDG production will increase by about 4 million metric tons this year over 2005/06.
This will be offset by a reduction of some other feed ingredients. The same private analyst says that 527 million bushels of corn will be displaced by DDG this season. This is 185 million more bushels than was displaced last season.
As DDG supplies grow, not only will more corn in rations be displaced but it could result in some protein meals being replaced.
USDA, in its September production report, forecast the 2006/07 average farm price for corn to range from $2.15 per bushel to $2.55. This compares to about $2 when the United States started the crop year with record large corn supplies.
Beginning corn stocks this season are second only to last year's record. However, projected record usage for ethanol production and large export sales will reduce ending stocks to just 1.220 billon bushels. This will result in the third lowest stocks to use ratio in the past 15 years and set the stage for a volatile futures market.
“World corn trade volume will set a new record and total coarse grain global trade volume will reach the lofty heights last seen near the end of the fabled ‘Russian deals' of the late 1970s and early '80s.
Wheat did not fare as well as corn in the United States and joined the rest of the wheat-producing world in a weather-impacted smaller crop. Morrison noted that the poor crops will result in the lowest world wheat ending stocks in the last 25 years.
“Global demand for wheat will keep U.S. exports well supported despite our relatively tight domestic supplies.”
Global demand for wheat for the world's main wheat exporting countries, excluding the United States will drop by more than 30 percent. “All of these conditions will keep wheat prices highly volatile as we have seen in recent market action.”
U.S. average farm price for wheat this season is projected to range from $3.95 to $4.45 per bushel compared to the $3.42 average price for last season.
The U.S. protein meals market may be the one exception to domestic and global trends of decreasing grain production and tightening supplies.
U.S. soybean farmers may set a new crop record this season, according to Morrison.
Soybean meal supplies should be satisfactory this year. However, soybean oil disappearance has been slow, which may lead to processors slowing crushing rates until they can ship more oil. Recent U.S. soybean oil stocks have been at an all-time high. “Their hope is that the new biodiesel production will ramp up quickly and take up the slack,” said Morrison.
U.S. export sales will be made easier due to reduced competition from South American exporters. Morrison said both Brazil and Argentina are facing tighter domestic soybean stocks. “However, Argentina crushers are still on track to take a larger share of global soybean meal exports, mostly at Brazil's expense.
“China continues to be the driving force behind increasing global demand for soybean and soybean products.” China soybean imports are expected to set another record this year.
Overall, grains and protein meal markets “present extreme situations over the next year.” At one end are short wheat supplies and on the other end are ample soybeans.
“Somewhere in the middle lie the feed grains where good production is losing the race to robust and fast growing demand,” he said.
For next year and beyond, Morrison believes the market “will become increasingly concerned with crop acreage projections.”
The question is how can the United States increase all grain and oilseed production enough to replenish wheat stocks and move corn production ahead of growing demand from ethanol while maintaining sufficient soybean supplies?
Improved genetics could be one answer. However, Morrison believes it will take more than that. It will take “significant” more acres going into grain and oil seed production. That may lead to release of conservation reserve acreage.
“Amidst this uncertainty, we would expect prices will remain well supported on breaks and volatile,” he concluded.