Corn Pops as USDA Sees Drop in Supply
- By SCOTT KILMAN And IAN BERRY
The outlook for global grain supplies and food prices grew more precarious Wednesday as the U.S. Agriculture Department said it expects U.S. corn supplies to fall to the near-record low level set 15 years ago.
Red-hot prices aren't cooling the appetite for U.S. grain as in the past, which means U.S. supplies are continuing to be drained at a rapid rate to make ethanol fuel, fatten livestock and meet demand overseas.
"We're just not seeing prices ration demand," said Luke Chandler, head of agricultural commodity markets research at Rabobank. "The markets have changed in a structural way due to ethanol. ... Any relief will take considerable time."
According to USDA projections released Wednesday, the 12.4 billion bushels of corn harvested by U.S. farmers last fall will dwindle to just 675 million bushels by Aug. 31, when a new harvest begins to replenish inventories.
That ending stocks number, which is off 9% from the USDA's January projection, is extraordinarily low in the eyes of food executives because it represents just 5% of annual use, matching the stocks-to-use ratio set in 1996, which was the lowest recorded by the USDA for America's biggest crop since the Dust Bowl era, when the U.S. stocks-to-use ratio fell to 4.5% in 1937.
In trading at the Chicago Board of Trade Wednesday, the corn futures contract for March delivery jumped 24.25 cents a bushel, or 3.6%, to settle at $6.98 a bushel. While the USDA left its wheat and soybean projections largely unchanged, prices of these commodities rose in sympathy with corn.
With Tuesday's gains, prices of corn futures contracts have climbed 97% since June; wheat is up 107% and soybeans are up 56%.
The USDA increased its one-month-old projection of how much of the recent U.S. corn harvest will end up as ethanol by 50 million bushels to 4.95 billion bushels, or 40% of the harvest.
While high grain costs are pinching many food companies, U.S. ethanol makers are generating profits in part because Washington is mandating that gasoline blenders use 12.6 billion gallons of biofuel this year, up from the 2010 mandate of 12 billion gallons.
Washington's support of the ethanol industry is intended to reduce U.S. dependence on foreign oil. But one reason the ethanol industry's appetite for corn is continuing to expand is that it is putting biofuel in foreign cars.
An even steeper rise in sugarcane prices is depressing exports of sugar-derived ethanol from Brazil, opening markets for the U.S. industry, which saw its exports triple in 2010 to 350 million gallons, according to the Renewable Fuels Association, a Washington trade group.
Evidence of the ethanol industry's expanding appetite for corn increased tensions between it and the food industry. "The fact that more U.S. corn is being exported in the form of ethanol at a time when corn supplies are already low is simply indefensible," said a statement issued by Tyson Foods Inc., the Springdale, Ark., meat giant. "We've got to get our energy and agriculture policies in sync."
The Obama administration defended its ethanol policy Wednesday. At a public appearance with other cabinet members, Agriculture Secretary Tom Vilsack said he doesn't think the ethanol industry's appetite for corn is raising food costs.
"I'm not concerned about it," he said. "I think there is going to be enough corn for food, for feed, for fuel and for export opportunities."
Still, grain analysts are having a hard time comprehending how grain consumption can continue at these high levels, and not just because of ethanol's appetite. Analysts say the cheap dollar is helping to insulate export demand for U.S. commodities, which is also being helped by production problems in farm belts around the globe.
The USDA said Wednesday it expects U.S. wheat export volume to soar 48% this year in the wake of the drought that decimated Russian wheat farms last summer, slashing exports from the Black Sea region.
Likewise, rising U.S. livestock prices are discouraging many farmers from shrinking the size of their herds, keeping up their demand for grain. U.S. pork exports are up in part because South Korea's effort to eradicate an outbreak of foot-and-mouth disease on its pig farms is forcing it to buy more foreign pork.
A drought in China is raising concerns about the condition of the wheat crop there but the USDA won't try to assess the size of the potential harvest there until its May report.
China is the world's biggest producer and consumer of wheat but it is far from clear how any significant drop might impact international markets. The Chinese government has a policy of maintaining enormous grain stockpiles as insurance against any bad harvests.
Indeed, the USDA projected Wednesday that China will control 49% of the world's combined corn reserves, and 33% of the world's total wheat reserves, this year.
—Ryan Tracy and Ben Lefebvre contributed to this article.
Write to Ian Berry at ian.berry@dowjones.com
Red-hot prices aren't cooling the appetite for U.S. grain as in the past, which means U.S. supplies are continuing to be drained at a rapid rate to make ethanol fuel, fatten livestock and meet demand overseas.
"We're just not seeing prices ration demand," said Luke Chandler, head of agricultural commodity markets research at Rabobank. "The markets have changed in a structural way due to ethanol. ... Any relief will take considerable time."
Bloomberg News
With Tuesday's gains, prices of corn futures contracts have climbed 97% since June; wheat is up 107% and soybeans are up 56%. Above, harvested corn is unloaded from a combine harvester into a grain cart on a farm near Peru, Ill.
That ending stocks number, which is off 9% from the USDA's January projection, is extraordinarily low in the eyes of food executives because it represents just 5% of annual use, matching the stocks-to-use ratio set in 1996, which was the lowest recorded by the USDA for America's biggest crop since the Dust Bowl era, when the U.S. stocks-to-use ratio fell to 4.5% in 1937.
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With Tuesday's gains, prices of corn futures contracts have climbed 97% since June; wheat is up 107% and soybeans are up 56%.
The USDA increased its one-month-old projection of how much of the recent U.S. corn harvest will end up as ethanol by 50 million bushels to 4.95 billion bushels, or 40% of the harvest.
While high grain costs are pinching many food companies, U.S. ethanol makers are generating profits in part because Washington is mandating that gasoline blenders use 12.6 billion gallons of biofuel this year, up from the 2010 mandate of 12 billion gallons.
Washington's support of the ethanol industry is intended to reduce U.S. dependence on foreign oil. But one reason the ethanol industry's appetite for corn is continuing to expand is that it is putting biofuel in foreign cars.
An even steeper rise in sugarcane prices is depressing exports of sugar-derived ethanol from Brazil, opening markets for the U.S. industry, which saw its exports triple in 2010 to 350 million gallons, according to the Renewable Fuels Association, a Washington trade group.
Evidence of the ethanol industry's expanding appetite for corn increased tensions between it and the food industry. "The fact that more U.S. corn is being exported in the form of ethanol at a time when corn supplies are already low is simply indefensible," said a statement issued by Tyson Foods Inc., the Springdale, Ark., meat giant. "We've got to get our energy and agriculture policies in sync."
The Obama administration defended its ethanol policy Wednesday. At a public appearance with other cabinet members, Agriculture Secretary Tom Vilsack said he doesn't think the ethanol industry's appetite for corn is raising food costs.
"I'm not concerned about it," he said. "I think there is going to be enough corn for food, for feed, for fuel and for export opportunities."
Still, grain analysts are having a hard time comprehending how grain consumption can continue at these high levels, and not just because of ethanol's appetite. Analysts say the cheap dollar is helping to insulate export demand for U.S. commodities, which is also being helped by production problems in farm belts around the globe.
The USDA said Wednesday it expects U.S. wheat export volume to soar 48% this year in the wake of the drought that decimated Russian wheat farms last summer, slashing exports from the Black Sea region.
Likewise, rising U.S. livestock prices are discouraging many farmers from shrinking the size of their herds, keeping up their demand for grain. U.S. pork exports are up in part because South Korea's effort to eradicate an outbreak of foot-and-mouth disease on its pig farms is forcing it to buy more foreign pork.
A drought in China is raising concerns about the condition of the wheat crop there but the USDA won't try to assess the size of the potential harvest there until its May report.
China is the world's biggest producer and consumer of wheat but it is far from clear how any significant drop might impact international markets. The Chinese government has a policy of maintaining enormous grain stockpiles as insurance against any bad harvests.
Indeed, the USDA projected Wednesday that China will control 49% of the world's combined corn reserves, and 33% of the world's total wheat reserves, this year.
—Ryan Tracy and Ben Lefebvre contributed to this article.
Write to Ian Berry at ian.berry@dowjones.com
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