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Who gets dibs on corn?
The shortfall in corn production will put intense pressure on all corn end users – exports, ethanol, livestock, and other processors. Scott Irwin, University of Illinois farm economist, holds out hope that we can get past the drought of 2012 with all segments bruised but intact.
His analysis starts with the assumption that we'll harvest nearly 11 billion bushels of corn in 2012 (latest USDA estimate is 10.8 billion bushels). That's about a 130-bushel-per-acre average on 85 million harvested acres. And, Irwin says, there will be about a 1 billion-bushel carry-in from last year to 2013 and next year a carry-out of 600 million bushels. That leaves 11.4 billion bushels to be divvied up among end users over the next year.
If the corn crop ends up at a 120-bushel national average, however, that's less than 10.5 billion bushels total (Irwin now thinks that is a good possibility). And that changes everything, particularly for livestock producers.
Here's Irwin's breakdown of how this short corn crop will be divvied up.
Exports: Historically, Irwin says, exports have been less sensitive to price spikes than other markets. The big markets like Japan have the buying power to keep their purchases up to maintain feeding industries. “Before the drought, we expected a reasonable recovery in corn exports in the coming year because of economic recovery, particularly in China,” says Irwin. “We were at a very low level last year at 1.6 billion bushels of corn exports. Before the drought, we expected that to rebound to about 1.9 billion. But at today's prices, we can drop that back to about 1.4 billion bushels. It'll be the lowest level in decades, but we don't expect it to drop much further.”
Non-ethanol corn processing: This industry produces corn sweeteners and corn oil. It, too, is typically inelastic, and it doesn't respond much to price spikes. It will use about 1.3 billion bushels of corn.
Ethanol: Irwin doesn't see this industry falling off much in corn usage and ethanol production, either, despite the pressure of $7.50 corn. And it's not entirely because of EPA renewable fuels mandates that require ever-escalating levels of production. The key is another incentive for gasoline blenders to use ethanol.
Ethanol started as a fuel oxygenating additive, an environmentally friendly substitute for MTBE. “But since 2007,” Irwin says, “blenders have discovered that ethanol is a cheap source of octane enhancement in gasoline. Regular gasoline, the kind that we normally put in our cars, has an octane rating of 87 Btu. Ethanol has a rating of 106 to 113. What the blenders do is make a cheaper form of gasoline with an 84 octane rating, blend in 10% ethanol, and bring the mixture up to the required 87 octane. As long as ethanol is cheaper than the gasoline, that makes good economic sense.”
He points to current futures prices that have gasoline prices at 40¢ per gallon above ethanol. “They're going to keep blending and continue this same demand for ethanol,” he believes. The price relationship could change over time, he says, but so far it hasn't, despite ethanol plant shutdowns or slowdowns. And we have built up stocks of ethanol over the past year that will at least temporarily cushion supply issues.
The bottom line, at least for now, is that ethanol will consume 4.5 billion bushels of corn in the coming year. That's in line with previous projections, despite high corn prices, because gasoline blenders will continue to provide a strong demand for it.
Livestock: Add those numbers – 1.4 billion bushels for export, 1.3 for non-ethanol processing, and 4.5 for ethanol – and what's left can be fed to livestock, the most elastic demand sector (as price goes up, demand goes down).
That livestock number is 4.0 to 4.2 billion bushels available for feeding if the national yield average is near 130 bushels per acre. “If it goes below that, it's completely out of the hides of the livestock sector,” says Irwin. Before the drought, it was projected that we would feed 4.9 billion bushels to livestock, he says. So his new number is at least a 15% reduction, possibly as much as 25%, which would put livestock producers in extreme-adjustment mode. “It's painful, but not unprecedented,” he says. “We've done it before in other droughts.”
Given Irwin's scenarios, he believes livestock farmers can hunker down and hold the best breeding animals in their herds together. Even then, we're likely to see major feeding and production adjustments such as:
- Tapping into other grain sources like feed wheat from Europe or second-crop corn from Brazil.
- Culling heavily into lesser-productive breeding animals.
- Reducing grain and more roughage in cattle feedlot rations.
- Reducing animal slaughter weights.
“I think we can scrape by,” says Irwin. “But what happens if the corn yield actually drops below a 120 national average? All I can say is then it gets very painful – more than it is already. And we could see livestock numbers reduced by 20% to 25%. What I have laid out is really at the outer limits of what the livestock sector can handle by the skin of their teeth. It's a best-case scenario. And even with it, there's a lot of financial pain.”
He also says to remember that a crop shortfall of the magnitude of this year will likely take several years from which to recover. Other major production areas of the world will also adjust.
See Irwin's full analysis at farmdoc.illinois.edu.