As growth in demand for biofuels begins to slow and Chinese grain demand remains uncertain, U.S. corn prices could be pressured to below breakeven levels, according to a new report from the Rabobank Food & Agribusiness (FAR) Research and Advisory group.
The report, “AgFocus: Bracing for Tightening U.S. Grain Margins,” notes softer medium-term prices could lead to a contraction of 5 to 6 million U.S. acres as growers look toward other crops.
“The three largest drivers of U.S. grain prices over the next few years will be demand from the U.S. ethanol industry, import demand from China and supply performance in Brazil,” says report author and Rabobank Food & Agribusiness Research and Advisory (FAR) group Vice-President, Sterling Liddell.
The report finds an environment of slowing demand growth for biofuels in the U.S. and Europe, and improving ability for Brazil to export. These factors will likely lead to a dampening of prices and margins for the U.S. over the next three to five years.
The report goes on to say the two biggest wildcards are U.S. weather and demand from China.
The report authors believe growth in China’s overall demand for grain and oilseed imports is likely to moderate in the medium-term as meat demand slows from its recent high levels. This moderation is despite the likely rapid continuation of the industrialization of China’s animal protein industry, which is being stimulated by a string of food safety problems.
“It’s our belief that corn prices will adjust lower, with a long-term mid-point of around five dollars per bushel,” notes Liddell.
“We also anticipate U.S. corn exports will struggle to regain 2009 levels, as farmers are impacted by these tighter margins. As a result, farmers will be forced toward cost efficiency, productivity growth and tighter financial management, and away from investment and business growth.”
A summary of the complete report follows:
• Rabobank lowers medium-term (one to three years) average U.S. corn mid-point price expectations from USD 6.00 to USD 5.00 per bushel.
• Softer medium-term prices will pressure corn farming margins and see acreage to corn contract by 5 million to 6 million acres in the medium term in favor of other crops or uses
• Demand headwinds for U.S. grains from both the U.S. ethanol industry and China along with strong supply performance in Brazil will be the three largest drivers of U.S. grain prices over the next few years.
• ·U.S. ethanol usage growth has slowed as legal, regulatory and infrastructure challenges limit the ability of E15 and E85 to help the industry overcome the 10 percent blend wall.
• ·Chinese corn demand remains a wildcard, with some concerns over the 2012/13 crop raising the potential for increased corn imports in the next year.
• Expanded global supplies, particularly from Brazil, are likely to limit the U.S.’ ability to achieve the 2009 export level of 1.9 billion bushels in the medium-term.
• U.S. cost of production for corn, ranging between USD 4.40 to USD 5.20 per bushel on average, creates structural support for corn prices in the medium to long-term.
• Given “normal” seasonal conditions in 2013 in both the U.S. and China, we expect corn prices to be pressured below breakeven (USD 5.00 per bushel) for higher cost operations in 2012/13.
• Tighter margins will change farmers’ strategies beyond 2012/13 toward cost efficiency, productivity growth and tighter financial management, and away from investment and business growth.
For more on Rabobank America, see http://www.raboag.com/.