What is in this article?:
• “It’s an ethanol story — that’s the world we live in with feed prices,” says Mark Welch, economist with Texas A&M University.
• Other factors are supporting what is happening in the grain market, but ethanol is the driver. It’s the big machine behind these current prices.
• Numbers from previous years show, he says, that grain use can go down during a recession. But in the current recession — which is the worst since the Great Depression — use has continued to climb, and biofuels have been a big factor.
Slight dip in feed use
According to USDA demand categories, there has been a slight dip in feed and residual use for 2010, exports are up some, but ethanol is still the driving force, says Welch.
Much of the price response seen recently in the corn market is due to lowered expectations on yield prospects for the 2010 crop, he says. “Last year, we were coming off a record crop of 164.7 bushels per acre. USDA’s most recent estimate is 162.5 bushels per acre. Even though the market has risen in response to a yield shortage, we may not have accounted for all of the acres out there. Until we know for sure, there’s a lot of speculation.”
It has been a while, says Welch, since the corn crop yield average was below the trend line. “With the advances in technology and modified seed, we hear remarks that there will be no more crop failures. I’m not quite on that bandwagon, but the productivity we’ve built into this corn market is amazing. If we do have a crop shortage, given our carry-over stocks, things will get serious in a hurry.”
The supply and demand numbers tell an interesting story, says Welch. “With the reduction in yield expectations, we’ve seen a drop in production estimates. And with higher prices, we’ve dropped domestic use somewhat. With what’s happening around the world, we’ve responded to that with higher expectations for exports.”
Ending corn stocks are well below last year, he says, and well below the five-year average, demand has increased, and last year’s crop is being used at a faster rate than was thought. All of these factors have created the current supply situation.
Ethanol prices, says Welch, have increased dramatically over the last several months, from about $1.50 to about $2 per gallon. “As we’ve seen prices going up late this summer, higher ethanol prices have compensated for that.”
At $2-per-gallon ethanol, the ethanol plant can afford to pay about $4.40 per bushel for corn and stay in the black, he says. Lower ethanol prices or higher corn prices will push the plants back in the red.
Looking at U.S. plantings for 2011, Welch doesn’t think an anticipated increase in anhydrous ammonia will affect growers’ decisions to plant corn. “I don’t see that as a factor in terms of farmers not planting corn. There is enough incentive in the market to attract the acres we need today. We’re not going to lose acres to soybeans at these prices. We’ll see more corn acres in 2011.