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Can the U.S. ramp up demand?

CHERYL TEVIS 11/06/2013 @ 11:05am Cheryl has been an editor at Successful Farming since 1979.

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.

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