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While anecdotal harvest reports in late September had the trade expecting lower corn yields from earlier forecasts, the U.S. Department of Agriculture in its Oct. 8 Crop Production report unexpectedly slashed its 2010 corn production and yield estimates by 4% from September, to 12,664 million bushels and 155.8 bushels an acre, respectively, from 13,160 million bushels and 162.5 bushels an acre and compared with record highs of 13,110 million bushels and 164.7 bushels an acre in 2009. At the same time, the USDA in its Oct. 8 World Agricultural Supply and Demand Estimates lowered its projected carryover of corn on Sept. 1, 2011, by 19% from September, to 902 million bushels, the smallest since 1996-97, and raised its projected 2010-11 price paid to farmers by 60 cents, to a range of $4.60-5.50 a bushel compared with $3.55 a bushel in 2009-10.
The much-watched corn ending stocks-to-use ratio sank to a historically low 6.7% for 2010-11, compared with “normal” levels between 13% and 15%, one market research group said.
As a result, corn futures prices staged an impressive contra-seasonal rally, farmers became bullish and began storing corn despite one of the earliest harvests on record, and wheat and soy complex futures became followers of corn.
Late last week, nearby December corn futures were up about 75 cents a bushel, or 15%, since the Oct. 8 crop report, up about $2.30, or 67%, from the 2010 low of $3.43½ on June 29, and up about $2 a bushel, or more than 50%, from a year ago.
The impact on demand and feed prices also followed as the USDA in its Oct. 8 WASDE trimmed its 2010-11 U.S. corn export projection by 5% to 2,000 million bushel, due in part to tighter available supplies and higher prices.
“With higher prices forecast for feed grains this month (October), most of the 2011 (domestic) production forecasts for meat, milk and eggs are reduced,” the USDA said in its Oct. 13 Feed Outlook.
In its Oct. 8 WASDE, the USDA reduced from September its projected 2011 production of pork by 165 million lbs (0.7%), broiler meat by 248 million lbs (0.7%), turkey meat by 40 million lbs (also 0.7%), eggs by 25 million dozen (0.3%) and milk by 200 million lbs (0.1%). In all cases the department also noted the cutback in protein output ultimately would reduce feed demand from the specific sectors.
One market research firm noted protein (red meat and poultry specifically) prices ultimately were “dictated” by production levels, not by input or feed costs.
Last week a well-respected research firm noted estimated profit margins for broiler producers moved into the red for the first time this year due to a combination of higher feed costs and seasonally weak broiler prices. The analysts saw estimated hog production profit margins sink to near breakeven for the first time since April. Average hog profit margins were below breakeven for all of 2009 and most of 2008.
Less than a week after the USDA estimate, on Oct. 13, major U.S. corn refiners withdrew earlier offers to contract various 2011 corn sweeteners at 3-3.5 cents a lb above 2010 contracted levels and offered 55% high-fructose corn syrup (used mainly in beverages) and dextrose at 4.5 cents a lb above 2010 levels, 42% HFCS (used in baking and other food applications) at 4 cents a lb above and regular corn syrup at 4.25 cents a lb over. The latest offers were effective until Oct. 29, 2010. It appeared most users missed the short-lived 3 3.5 cents-a-lb increase but were booking considerable volume at the 4-4.5 cents-a-lb increase before prices ratchet up another 1 cent a lb on Oct. 30.
Adding to the potential for increased corn use, or at least limiting the possible demand erosion due to higher prices, and much to the chagrin of the livestock industry, the Environmental Protection Agency on Oct. 13 raised the allowable ethanol blend in gasoline to 15% from 10% for 2007 and newer vehicles.
The USDA projects the ethanol industry will use 4,700 million bushels of corn in 2010-11, or 37% of estimated 2010 corn production, up from 4,560 million bushels, or 35%, in 2009-10, although much of the “lost” feed potential is returned in the form of distillers grains. Even at current corn prices, analysts estimated ethanol producer profit margins were about 20 cents a gallon in October.
While the boost to 15% ethanol was expected to have little immediate impact on ethanol demand, and thus corn use, it did serve to reignite the fuel versus food debate that has been on the backburner for the last couple of years.
