Sufficient Corn Supplies Will Cost More

USDA's May Crop Production and World Supply and Demand Estimates (WASDE) reports contained both good news and bad news for pork producers.

USDA's May Crop Production and World Supply and Demand Estimates (WASDE) reports contained both good news and bad news for pork producers.

The good news is that USDA predicts slightly larger-than-expected year-end stocks this fall and enough production this year to meet all needs and begin rebuilding grain stocks by the end of the 2011-12 crop year. The bad news is that, in spite of these projected sufficient supplies, prices will actually be higher this year.

Figure 1 shows USDA's projected corn supply and utilization for the coming year. The 2010/11 year-end stocks were raised in the May report from 675 to 730 million bushels. Analysts were expecting that number to fall to 665 million bushels, so this in itself has pushed old-crop corn prices lower. USDA made no changes to projected corn acres in this report, but recent flooding episodes and continued wet weather in North Dakota, the Eastern Cornbelt and the Delta will likely force a reduction at some point. That probably won’t occur until the June 30 Acreage Report, which is based on surveys of actual plantings.

USDA's May yield estimate of 158.7 bushels per acres is 2.4 bushels or 1.7% below the long-term yield trend, revealing some concern about crop conditions and the relatively slow pace of planting this spring. The 13.505-billion-bushel crop would still be record large.

Total corn usage is currently pegged at 13.355 billion bushels, almost 100 million lower than this year. Lower exports and feed/residual usage are the main downward drivers, easily offsetting a projected 50-million-bushel increase in ethanol usage.

Evaluating Ethanol Usage
That increase in ethanol usage is oddly small given that the renewable fuel standard ethanol blending mandate rises by 600 million gallons this year, enough to use an additional 214 million bushels of corn. But the reason for the small 2011-12 ethanol usage increase is that ethanol production exceeded the renewable fuel standard in 2010 by 790 million gallons and will exceed the 2011 standard by 1.4 billion gallons. Next year's 50-million-bushel increase will push ethanol production to about 14.14 billion gallons, again higher than the mandated level – this time by 940 million gallons.

The reason for the higher ethanol output, of course, is high oil and gasoline prices that have made ethanol production profitable. And there could be another benefit important to livestock producers when gasoline companies blend more than the mandated amount they generate in credits called RINs – sort of PIK certificates for export blending – that they can use to satisfy portion of future mandated blending levels. If corn prices get high enough or gasoline prices get low enough or some combination of the two happens, blenders will use these RINs to reduce blending which will, in turn, reduce ethanol demand and ethanol’s demand on corn supplies.

Crop Price Forecasts
Even with these positives, though, USDA predicts that the weighted average farm price of corn is expected to average a record $5.50 to $6.50 per bushel in 2011-12 vs. $5.10 to $5.40 this year.

For soybeans, lower planted acres will likely result in a slightly smaller U.S. crop. USDA projects 2012 year-end stocks to be 160 million bushels, 10 million fewer than this year, resulting in a season average farm price between $12 and $14/bushel. Soybean meal is projected to average between $350 and $380/ton compared to $350/ton this year.
This all means that production costs will very likely be record-high in 2011 and very possibly also in 2012.

Figure 2 shows projected costs and returns based on Iowa State University’s Estimated Costs and Returns production parameters for Iowa farrow-to-finish operations and Chicago Mercantile Exchange Group futures prices for corn, soybean meal and lean hogs last Friday.

Projected average production costs have moderated as soybean meal futures prices have fallen since January, and corn futures prices have fallen since March. Cost estimates for the second half of 2011 and first half of 2012 were over $90/cwt carcass back in February and early March. The average for all of 2011 now stands at $83.99/cwt carcass, while the average for the next 12 months (May 2011 through April 2012) is $85.78/cwt carcass.

Profit Prospects
Profit prospects for pork producers remain positive but not as positive as they were earlier this year. While corn and soybean meal prices have moderated some, the significant decline in Lean Hogs futures prices confirmed my earlier conclusions that the market was a bit over-heated and was providing excellent pricing opportunities for pork producers. Those opportunities are now gone, but there could still be plenty of fireworks on the cost side this summer.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]