March 23, 2006

 

Feed corn usage the first to be cut if US supplies tighten

 

 

US analysts are debating whether corn production can keep up with the market's demand, as the livestock industry, the ethanol industry and exports compete for corn supplies.

 

Although the past two growing seasons have produced an abundant crop, any shortfall in production this season will force the industry to look at cuts in usage, analysts said.

 

Feed and residual are the largest users of US corn and could be the first to be cut, said Dan Basse, president of AgResource in Chicago.

 

The USDA estimated 2005-06 usage at 10.885 billion bushels from a crop size of 11.112 billion. Feed and residual used up 6.0 billion bushels, 1.6 billion bushels were used for ethanol and 1.9 billion bushels were exported.

 

If the crop were reduced, there may be a 300 million- to 400 million-bushel drop in feed and residual use as unprofitable margins would force feeders to reduce production, Basse said.

 

The level of integration in the livestock sector and its flexibility enables it to control the size of animal numbers easily, said Basse. He added that these factors would allow producers to cut production to improve margins.

 

However, some felt the first impact of a smaller crop and higher prices would be felt on exports instead of domestic feed corn.

 

An increase in US prices would push up world prices, and minor exporting countries might export more while world prices are high and cut into US export figures. Furthermore, feed users in other countries would also source for cheaper alternatives thus dragging down US exports, Shawn McCambridge of Prudential Financial said.

 

The ethanol industry is the third-largest user of corn and is likely the last major consumer to be affected by a reduced crop in 2006. The industry is also rapidly expanding and has strong government backing, making corn used for ethanol less vulnerable to price increases.

 

As long as corn prices hover in the range of US$2.00 to US$2.50 a bushel, there will be continued demand in the ethanol sector, but if prices continue to climb above US$2.85, plants will begin to look at alternative raw products, said McCambridge.

 

Nevertheless, chances of a lower production in 2006 may be low. Analysts say there is a lot of potential in seed genetics to produce above average yields that could be enough to offset any increase in demand.