FEED Business Worldwide March, 2012

 

The coming corn export crisis: Will Latin America come to the rescue? 

 

by Eric J. BROOKS

 

 

The world is slowly stumbling into a world corn supply crisis while comforting itself with a key false assumption: South America will not come to the rescue of the world corn market in the 2010s the same manner that it sustained soy export expansion in the 2000s. Over the years, a number of countries, ranging from Thailand to Argentina, China to South Africa, have played the role of second or third-ranked global feed corn supplier behind the United States, only to fall off the export rankings or become outright importers. We shall see that the Latin American candidates for supplying the world with corn to satisfy growing meat demand may not be up to the job.

 

 

 

And we must begin by stating that this situation has been unfolding for quite some time: World corn production increased 43% from 2000 to 2011 but the US (which usually supplies over 50% of corn exports), is shipping nearly 20% less or roughly 10 million fewer tonnes of corn than during its mid 2000s peak

 

With US ethanol demand exceeding that for domestic feed corn in the foreseeable future, the question of who can join America as a reliable corn exporter is becoming a critical one.

 

In the five years since 2006/7 season, world corn consumption increased 20.5%. Yet, the top five corn exporters (America, Argentina, Brazil, South Africa and Ukraine) are not shipping any more corn this year than they did in 2006/7. - In fact, at 80.4 million tonnes, they will ship 10.5% less corn than during their 2007/8 peak of 88.8 million tonnes. Such flat export numbers in the face of rising global meat demand are responsible for many of corn's recent strong rallies.

 

With corn prices at an all-time high and exports remaining flat, it also begs the following question: With ethanol taking so many potential exports out of circulation, are corn growing's input constraints making its export numbers unresponsive to price increases? The answer lies in a combination of South American economic demographics, the relationship between investment returns and marginal lands and even multi-decade climate cycles.

 

 

 

What must be understand first and foremost is that this problem goes far beyond America's ethanol addiction - while the ethanol-induced decline in US corn exports is well known, less publicized is the disappointing South American performance. As the only part of the world with ample arable land and water, it was hoped that Brazil and Argentina would contribute to feed corn supplies in the same manner that they broke America's export monopoly on feed soy two decades earlier. This however, has not come to pass.

 

Despite the lure of high corn prices bringing a record amount of land into cultivation this year, the last five years have seen Argentina's corn exports remain stubbornly stuck in the 14 million to 17 million tonne range. Similarly, rather than growing as they did in the case of soy, Brazil's corn exports have remained stuck in the 7 to 11 million tonne range throughout this time. Indeed, Argentina is a particularly interesting case: Unlike Brazil, not only are its exports flat, so are Argentina's harvests.

 

What is most interesting about South America's flat corn exports is that unlike the United States, Brazil and Argentina do not turn their corn crops into ethanol. - And this behooves us to ask if today's high corn prices are enough to bring additional South American corn supplies to the world market, especially since a half decade of historically high prices have failed to do so.

 

To understand the underlying dynamics, we need to dig deeper into the market fundamentals which govern Brazilian and Argentine corn supplies.

 

 

 

Brazil's 2010 feed corn demand was 40.7 million tonnes, with approximately 7 million tonnes diverted to human or industrial use and 9 million tonnes exported. With meat exports and domestic consumption both rising strongly, a recent Rabobank report ("Will There Be Any Corn Left? Brazil as a swing factor in the international corn market": Rabobank Industry Note #235) expects Brazil's feed corn demand to jump by 15.5% to total 47 million tonnes by 2015. With human and industrial use expanding to eight million tonnes by that time, Brazil will require 55 million tonnes of corn by mid-decade.

 

What is important to note is that with crop yield growth falling off, much of South America's corn output increase was accomplished by bringing new arable land in production. Rabobank noted that with much of Brazil's best land already brought into production, there was less of an incentive to bring in newer, marginal land into corn growing use. This caused the rate of increase in arable land under corn cultivation to fall from over 2% earlier to 0.9% at this time.

 

With Brazil's corn growing land under cultivation increasing at this slower rate, Rabobank expects the country's corn feed demand to rise more quickly than its harvests. Having never exceeded its 2009/10 peak of 11.6 million tonnes, Rabobank projects that Brazil's corn export volume could drop to as little as 2 million tonnes by 2015/16. With Brazil's remaining marginal corn growing land requiring much higher rates of return than land previously brought under cultivation, Rabobank's report concluded that this fate can only be averted if corn prices rise substantially above today's already historically high levels.