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Corn export competition
With the smallest U.S. corn crop in nine years now in the bin, attention turns to marketing that crop. This year, marketing doesn't appear to be a big problem. Most analysts say the problem is not in finding buyers for 2012 corn, but in rationing the limited supply.
In fact, based on USDA's supply-and-demand estimates, every kernel harvested this fall is figuratively spoken for – and then some. Based on its October harvest estimate, USDA predicts that 2012-2013 demand for U.S. corn will exceed production by 444 million bushels. Corn users will have to dip into already-tight old-crop reserves in order to make up that 444 million bushels. The U.S. will even import corn.
Still, U.S. farmers will market their corn at record-high prices, which USDA says should average somewhere between $7.10 and $8.50 on a cash basis.
U.S. losing market share
Fortunately, with ethanol production mandated by the government, it's not hard to find a domestic market for much of U.S. corn, even at these prices. But export markets are another story.
The U.S. has seen shrinking corn export volume for the past two years, with an even bigger drop in the U.S. share of global corn trade. After decades of U.S. share of global corn in the 60% to 70% range, U.S. share is expected to fall to just 36.9% this year.
Put another way, the last time the U.S. corn harvest was as small as 2012's – in 2003 – the U.S. still exported 18.8% of its corn crop. But this year, the U.S. is estimated to export less than 10.8% of the crop.
Most of the U.S. drop in global market share has occurred in just the past several years. As recently as 2008-2009, the U.S. filled 56.9% of world corn trade. It dropped to 53.5% in 2009-2010 and to 49.2% in 2010-2011. A big drop occurred in the 2011-2012 marketing year (September to August), when the U.S. captured just 38.4% of the world corn market.
Some observers put partial blame on foreign concerns about U.S. corn quality after problems related to the wet 2009 harvest. But most analysts simply blame shrinking exports on the reduced harvests of the past couple of years.
“It's a function of the market,” says Ken Smithmier of the Hightower Report. “After those short crops, our prices are higher than other suppliers.”
Indeed, foreign grain buyers have turned to a host of other countries for corn. The largest supplier of corn after the U.S. is Argentina, which has boosted its world market share from 18.25% in 2009-2010 to an estimated 19.25% this year.
Brazil, already a major competitor for U.S. soybeans, has seen its world corn share rise from less than 9.3% in 2009-2010 to 16% this year.
“Brazil has been more purposeful recently in developing its land for corn,” says Erick Erickson, director of global strategies at the U.S. Grains Council, a cooperative effort that focuses on promoting U.S. feed grains overseas.
Reports suggest that, on the export market, Brazil and Argentina can undercut U.S. corn prices by 50¢ to $1 a bushel. And Ukraine is said to sell corn in export markets at about $2 a bushel below U.S. corn. (Analysts say that Brazil corn would be even cheaper in the export market if Brazil's internal transportation and grain infrastructure were better.)
In central Asia, Ukrainian grain production has prospered since breaking free of the central planning of Soviet-style bureaucrats. With its fertile soils and access to Black Sea ports, Ukraine now supplies 13.8% of the world's corn trade, up from just 5.45% in 2009-2010.
Ukraine has already made inroads into nearby markets like Turkey, where proximity to the Black Sea keeps transportation costs low. Egypt, well known for shopping around for the cheapest wheat and corn prices, has become a buyer of Ukrainian corn.
Ukraine's exports, as with Brazil's and Argentina's, have been helped by large grain companies pouring money into infrastructure like port storage and loading facilities, says Smithmier. Names like Cargill, Bunge, Archer Daniels Midland, and Dreyfus have long been active in South America, and those types of companies are now investing in Ukraine.
So far, China has not been a big corn market for Ukraine. But in the future, Ukraine is expected to be an important supplier to China. Smithmier notes that, this year, China has provided a $3 billion credit line that Ukraine can use to invest in higher-yielding seed, more pesticides, and other agricultural enhancements. Ukraine will repay the loans by shipping corn to China.
Elsewhere in the world, South Africa has boosted its corn exports by 45% since 2009-2010, but India supplies foreigners with more corn than South Africa. And India's corn exports are up more than 30% since 2009-2010. India has poor grain storage, so it exports both corn and wheat to avoid spoilage.
While short U.S. crops and higher prices the past couple of years have helped turn foreigners away from U.S. corn, Erickson says the shift in foreign thinking really started around 2006-2007, when a series of renewable-fuel laws required the use of ethanol in U.S. gasoline.
“Foreign buyers could see the ethanol industry would start using a lot more U.S. corn. So they started to look around to other countries that could export corn, saying, ‘We have to diversify our supplies,’ ” says Erickson.
And those foreign buyers were right about the U.S. ethanol industry, which expanded aggressively. The last time the U.S. corn harvest was this small, in 2003, only 1.204 billion bushels of the U.S. corn crop was used for ethanol. This year, USDA expects 4.5 billion bushels to go toward ethanol production.
Put another way, the last time the corn harvest was as small as 2012's, less than 12% of the crop went toward ethanol. This year, it's 42%.
An export recovery?
Corn farmers won't always enjoy record-high prices, so they'll need export markets to come back. Lower prices are needed to bring back those foreign buyers. Until then, the U.S. Grains Council (USGC) is still promoting U.S. corn overseas. That involves visiting foreign buyers on their home turf, often with U.S. farmers as ambassadors, to maintain the personal contacts that are so important to a long-term customer relationship.
The USGC also brings foreign corn buyers to the U.S., so they can meet with farmers, visit the fields, and see first-hand the technology and infrastructure that makes the U.S. the world's top corn exporter.
As important as those visits are, Julius Schaaf, a southwest Iowa corn farmer and vice president of the grain council, estimates that about 60% of the roadblocks to U.S. corn exports are political, involving trade barriers and other governmental constraints within the buying countries. In addition to the USGC working directly to bring down import barriers, the council enlists the corn buyers themselves to lobby their governments on the need for freer trade.
That can include establishing free-trade agreements, lowering tariffs, raising import quotas, getting genetically modified varieties approved for import, and challenging antidumping lawsuits.
The USGC, with offices around the world, also lends technical assistance for large-scale livestock operations overseas. The USGC is beginning to see more large U.S.-style poultry and dairy operations going up, and they require a lot of feedstock.
Dairy boosts feed needs
For example, says Schaaf, China is adopting U.S.-style dairy operations after a major adulteration scandal in 2008 that killed six babies and sickened 300,000 others. The scandal involved as many as 22 companies, and now China is looking at the safety and efficiencies that can be achieved with the U.S. dairy model, says Schaaf.
That's part of a larger trend toward an expanding middle class in China and elsewhere in Asia. These urbanized, middle-class workers demand more meat and dairy, and that has boosted the need for livestock feed. In fact, over the past nine years, China has gone from being a substantial corn exporter to a net corn importer – despite a huge 73% expansion in its own corn harvest. (China's own corn crop is only about 25% smaller than the U.S. harvest.)
Schaaf, who recently attended a grain conference in Thailand, notes that new feed plants are going up in Vietnam and Indonesia. He also cites Mexico and the Caribbean as growing markets for U.S. corn due to increased demand for meat.
He has no doubt that U.S. corn exports will reverse their decline once the drought breaks and normal yields return.
“With limits to how far the U.S. ethanol and livestock markets can expand, I'm confident that the next growth market for U.S. corn will be exports,” says Schaaf, who's been promoting U.S. corn overseas for decades.
In fact, he points out that the U.S. is actually exporting far more corn than USDA puts in its reports. That's because USDA measures only raw corn. But when Schaaf adds back in U.S. exports of corn gluten feed and dried distillers' grains (DDGs), he figures that about 10 percentage points could be added to U.S. market share.
“DDG exports are a big success. DDG is such an easy sell, as the importers have starch, but they need protein for their livestock. All we have to do is show them the product, and it sells,” he says. “DDGs have moved into every place where the U.S. sells corn,” says Schaaf.
The U.S. also exports corn when it sells ethanol and meat overseas, Schaaf notes. He says that China, adding hundreds of thousands of cars a year, needs ethanol “in the worst way.”
Meanwhile, Schaaf wonders if lower corn prices in the future might not pull some marginal foreign acres out of production, giving the U.S. an opportunity to expand its corn exports. “It doesn't make economic sense to plant some of those (foreign) acres if prices pull back,” he says.
Overall, the U.S. is losing share in the world corn market, but it's not necessarily losing markets. The world corn-consuming pie is expanding. The U.S. has a smaller slice, but it's a bigger pie. And a bigger pie is a good thing. As long as American corn producers can find a willing buyer who will pay a good price for U.S. corn, it shouldn't matter whether those buyers are foreign or domestic.