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Can the U.S. ramp up demand?

Dave Hommel’s crops this year were better than expected.  The Eldora, Iowa, farmer feeds about half of the corn and beans he grows to his 150-head farrow-to-finish sow herd. With heady grain prices headed back down to earth, Hommel is focused on how lower feed prices and shrinking ethanol demand will impact his 2014 business plan.

“I think the next few years may be a good time to be diversified,” he says. “Margins are getting much tighter, and some equity is going to be used up. I’m looking forward to reduced feed costs. It’s been several years since I’ve been able to buy reasonably priced bean meal.”

For grain producers (as well as livestock producers like Hommel who feed part of their crops), it’s a critical transition.

“The U.S. has dominated world corn exports since 1971,” says Daryll Ray, Center for Ag Analysis, University of Tennessee. “Since U.S. exports peaked in 1979, U.S. corn production has increased by 74%, while foreign production has risen 171%. As production by non-U.S. farmers increases, so do their exports. Increases in technology and the rate of adoption of technology have the potential to keep this trend going.”

The U.S. has shared the global soybean market with Brazil and Argentina for the past decade. This year, Brazil is likely to claim the title of world’s largest soybean exporter.

No one disputes that the U.S. will continue to be an important player in the export market. Looking to the future, it’s clear that exports have been hurt by a record-high price run and that global competitors are putting the pedal to the metal on corn and soy acres.

“Grain export markets and demand won’t be a savior or white knight for agriculture,” says Jim Knuth, senior vice president, Farm Credit Services of America. “Domestic demand will be more important in the future. Livestock and ethanol will be major market influences.”

Will U.S. domestic demand be up to the challenge?

An escalating ethanol-fueled script set the stage for serious demand destruction of U.S. corn exports. The final curtain call was the crippling U.S. drought-induced 2012 crop shortfall.

“In the decade following 2000, use of corn for ethanol increased from 630 million bushels to just over 5 billion bushels, falling back slightly in 2011 and 2012,” Ray says.

Ethanol still claimed about 40% of the U.S. corn crop in 2012, but usage dropped after 28 of the 109 U.S. ethanol plants were closed in 2012 due to poor margins and lower demand.

USDA’s current projection of corn for ethanol production is at 4.9 billion bushels, indicating a small growth in consumption of ethanol blends above 10% during 2014.

However, ethanol production isn’t likely to sustain its past decade’s momentum as the demand driver. U.S. gas consumption has declined for the past five years. This trend is expected to continue, shaving ethanol use.

“With corn ethanol hitting the blend wall, it’s hard to see how this rate of increase can be sustained,” Ray says.

Based on data through July, total sales volume of E85 in Minnesota is only modestly higher than in early 2012, despite a significantly more favorable price ratio.

The USDA forecast of soybean oil consumption for biodiesel is up by 200 million pounds, to a total of 5.7 billion pounds. That’s up from an expected consumption of only 4.6 billion pounds.

EPA’s possible reduction of the 2014 biofuel mandate is a wild card in the mix.

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Livestock improves

Animal numbers in the U.S. plateaued over the past several years, as beef, dairy, and poultry producers struggled with steep feed costs triggered by epic drought and ethanol demand.

“Livestock producers who weren’t covered by federal crop insurance were hit in 2012 by a $9.1 billion increase in purchased feed costs,” Ray says.

As corn stocks rebuild, the outlook is for profit to return.

In the past decade, U.S. pork production has risen about 20%. Iowa has led the sector’s growth, increasing by more than 50%. Hog prices are expected to reach the mid-$60s in the last quarter of 2013 and rise to $65 in the second quarter of 2014, dropping to about $62 for a third-quarter average.

Cattle production will require more time to ramp up. There are 6 million fewer beef cows in the U.S. than 17 years ago. The 2012 drought caused large liquidation in the central and southern Plains. In 2013, producers suffered from poor pastures, a poor hay crop, and death losses from an October blizzard. Volatile feed costs, months of negative margins, and a shortage of feeder cattle led to a decline in 2013 placements and inventories. Lower beef production is a factor in lower red meat production, down by 4% from a year earlier.

Feed costs are shrinking, down to $120.38 per head, compared to $515.54 per head in 2012. Cash cattle prices may reach $134 to $138 per hundredweight in the fourth quarter of 2013.

The December 1, 2013, stocks estimate, released in January 2014, will help gauge feed and residual use.

The U.S. cattle industry also confronts demographics, as the average age of producers increases. Some older producers won’t rebuild their herds; young producers face sizable start-up costs.

Consumer demand is the real driver behind red meat and poultry prices. U.S. beef consumption is declining, except for prime and branded products. Pork is likely to gain a larger share, with August retail beef prices 45¢ higher than in 2012.

The U.S. per-person consumption of all meat at the retail level has declined.

“Resistance to higher beef and pork prices will likely continue to grow,” says Lee Schulz, Iowa State University assistant professor and Extension livestock economist. “The next several years will put demand in relatively uncharted waters, so it’s impossible to know exactly what to expect.”

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Meat exports grow

The good news is that U.S. corn and soybeans may be lifted on the shoulders of strong global meat demand.

In 2012, China, the world’s largest hog producer, was the third-leading importer of U.S. grain and the top importer of U.S. dried distillers grains with solubles.

The U.S. historically has been a net beef importer. Exports consumed 27% of total U.S. pork production in 2012 and 12.7% of total U.S. beef and variety meat.

“The more complete story about the U.S. livestock sector is its recent shift to a more export orientation,” says Carl Zulauf, Ohio State University. Assuming continued world economic growth, he expects the rate of meat exports to rise, and sees more potential for milk exports.

“Lower imports and higher exports are behind recent higher net beef exports,” says Darrell Mark, South Dakota State University adjunct economics professor.

Japan is a red-hot market, with Canada and Mexico very strong. Taiwan and Hong Kong are rising.

“Feed use could leapfrog over ethanol as the top use category in the near future,” says Scott Brown, University of Missouri ag economist.

Lower feed costs and expanding U.S. and global economies are key to meat exports. But more reliance also ramps up volatility.

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