USDA made some significant changes in its forecasted “usage” numbers for corn in this week’s monthly World Agricultural Supply and Demand Estimates. The adjustments reflect the significant changes that have occurred in oil and ethanol prices over the past two months as the world economy has slowed.
If there is one lesson from this, it is that the old admonition popularized by Milton Friedman that “there is no such thing as a free lunch” applies to all things – even those that are “can’t miss” opportunities on the wave of the future! Ethanol comes to mind.
Table 1 shows the changes in the USDA numbers, including:
A reduction in projected corn usage for ethanol from 4 billion bushels to 3.7 billion bushels. Don’t expect any further reductions as we move forward, since this is about the minimum given the 2009 renewable fuel standard (RFS) requirement of 10.5 billion gallons of ethanol. The 3.7 billion is, in fact, a bit low for next year’s requirement, but is easily justified by the mismatch between the crop year USDA is using and the calendar year to which the RFS applies. The projected 2008-09 usage is still 22% larger than this past year.
A reduction of projected exports by 100 million bushels to 1.8 billion. A major driver of this reduction is undoubtedly the slow progress of exports thus far this crop year and the increase in the value of the U.S. dollar. In addition, USDA expects stiff competition from feed wheat from the European Union (EU) and former Soviet Union (FSU) countries. South American corn exports are expected to fall and China is forecast to export only 20 million bushels this year.
A significant (31%) increase in projected 2009 carryout – to 1.431 billion bushels. That number is beyond the range of any of the pre-report estimates and pushed the forecast year-end stocks-to-usage ratio from 9% to 12.1%, nearly as large as this year’s 12.7%. This increase in stocks led Robert Wisner at Iowa State University to conclude that supplies would be “fully adequate to accommodate demand through late summer.” It also led USDA to reduce its forecasted season-average farm price range by about 40¢/bushel. The midpoint is now $4.
Some rearranging of soybean usage but no change to projected 2009 year-end carryout stocks, which remain equal to this year’s 205 million bushels. USDA did lower its forecast prices for beans, oil and meal with the mid-point on meal now at $270/ton, down from $285/ton last month. That price is still higher than all of the Chicago Mercantile Exchange (CME) Group soybean meal futures contracts for the coming crop year as of Friday at noon.
So, no change in soybean usage or stocks and a significant reduction in corn usage and concurrent increase in corn carryout. Soybeans should be neutral to up and corn down, right? Wrong, at least partially! Soybeans have indeed rallied with March up about $0.30/bu. March soybean meal is higher by nearly $9/ton. March corn futures, instead of falling on the lower usage numbers, are $0.30/bu. higher than Wednesday’s close as of Friday noon.
Have Grain Markets Bottomed Out? It still appears to me that the grain markets are trying to make a bottom. The markets’ reaction to the USDA numbers is in line with that and there is still one significant supply risk remaining – 11% of the corn acres are still unharvested. Wisner estimates that would account for 1.32 billion bushels. The longer this delay lasts, the higher the percentage of corn will be lost in the field and the lower USDA’s January estimate will be, suggesting higher prices in the months to come.
The opposing point of view will argue that cash corn is higher than it should be at present because cash corn sellers are holding their crop expecting higher prices and trying to avoid taxes on 2008 income. No doubt, that is true. Price movements in early January will be the telling sign on how big this factor really is.
Brace Yourself Livestock producers should get ready to be painted as the “bad guys” next year when meat prices rise. Retail beef and pork prices are already record high and, while both may decline some this winter, they will very likely set new records in 2009. Chicken prices are heading up as well as the broiler industry copes with huge losses. The World Agricultural Supply and Demand Estimates (WASDE) indicates that output levels for each of the four major protein sources will fall next year from this year’s levels – the first time that has happened since 1973.
Corn and ethanol groups have correctly claimed this past year that they should not be blamed for higher food prices. Neither corn nor soybeans directly account for much of the actual food we eat. Bread prices were driven by two short world wheat crops and dairy prices were generally driven by export demand.
But higher corn (and closely related higher soybean prices) in 2007-2008 will indeed be the key drivers of higher meat prices in 2009 and beyond. I fully expect to hear this from many ethanol apologists: “It’s not our fault that meat prices are higher – see how much lower corn prices are this year!”
I hope no one buys that line because it is not true and the biggest reason we are seeing any respite from higher grain prices is, of course, lower oil and gasoline prices. But feed costs are still about twice their historic levels and meat and poultry producers will have to keep output levels lower to realize profitable prices.
For the record again: I have no problem with making corn into ethanol, but I don’t think we should subsidize or require it, especially if corn supplies are tight and prices are high. A “counter-cyclical” ethanol subsidy designed to put a floor under corn prices, but not add to them when corn is scarce, seems to me to be a good idea. Let’s get to work on it.