June 20, 2011

Record world corn harvests might fail to meet global demand

A fifth consecutive year of record global corn harvests could fail to meet demand for food, fuel, and livestock feed, reducing world stockpiles to the lowest in two generations.

Consumption will rise 3% in the next marketing year, a 16th consecutive annual gain that saw demand jump 66% according to USDA estimates. Inventory will drop to 47 days of use, the fewest since 1974, the data showed. Waterlogged fields in the US, the largest exporter, will curb yields, Goldman Sachs Group Inc. said. Corn may jump 36% to a record US$9 a bushel if conditions worsen, Morgan Stanley said.

Corn purchases are accelerating as droughts and floods limit output gains in everything from soy to wheat, driving the Standard & Poor's Agriculture Index of eight commodities 60% higher in 12 months. China, the world's second-biggest consumer after the US, will use 47% more than a decade ago, adding an amount greater than the entire crop of Brazil, the third-largest producer.

"There is a storm developing in agriculture," said Jean Bourlot, global head of commodities at UBS AG in London. "If we have the slightest disruption in any part of the world, the effect on the price will be considerable."

Corn rose 4.9% in CBOT this year, even after dropping 7.4% last week to close at US$6.60 on June 17. Prices averaged US$7.0225 since Dec. 31, on track for the highest level ever. Costs are rising for Tyson Foods Inc. (TSN), the biggest US meat processor, and ethanol maker Archer Daniels Midland Co.

Drier weather enabled US farmers to complete about 99% of expected plantings by June 12. A total of 69% of crops were in good or excellent condition. Above-average prices will spur farmers to keep sowing even if it means lower yields, Goldman Sachs said in a report on June 13. The USDA will release its next acreage and inventory estimates on June 30.

US livestock owners may cull herds, increasing meat supply, because of higher feed costs. Wholesale choice-beef prices dropped 9.9% since reaching a record April 5, and pork is down 2.6% from a May 16 high, USDA data showed. Bacon retailed at US$4.77 a pound in May, 24% more than a year earlier, data from the Bureau of Labor Statistics showed.

Farmers also may replace corn with wheat in feed, because the grain is the cheapest relative to corn in 15 years. Effingham Equity, a feed and farm-supply company in Effingham, Illinois, will add wheat in hog-feed rations for the second time in a quarter century, said Mark Tarter, the grains-department manager. Tyson Foods is using some wheat for poultry, said Gary Mickelson, a spokesman at the Springdale, Arkansas-based company.

China's pork consumption doubled in the past two decades and demand for chicken quadrupled, the USDA estimates, boosting requirements for grain-based animal feed. Surging energy prices and subsidies spurred ethanol production, with the US industry using seven times more corn than 10 years ago.

Any decline in demand from livestock producers will be overwhelmed by the anticipated jump in Chinese consumption. The nation will use a record 181 million tonnes in the year that starts October 1, the USDA said in a June 9 report. China's pork production will reach an all-time high of 52.5 million tonnes in 2011, while chicken output will advance to 13.2 million tonnes, the most ever, according to the USDA.

US farmers are contending with extreme weather in several agricultural states. Rain delayed planting from North Dakota to Ohio, and floods damaged crops along the Mississippi, Ohio and Missouri rivers.

This year's weather patterns are similar to 1993 and 2009, Motew said. Yields rose in 2009 because the summer months were cool and there was no frost before the harvest, he said. In 1993, yields plunged 23 %.

"July and August will tell us, because the corn crop is made in that period of time," said Liddell of Rabo AgriFinance, a unit of Utrecht, Netherlands-based Rabobank Groep. "More things have gone wrong than have gone right."