Uneven Crop, Shifting Markets

Considering the prospects for the corn and ethanol markets ahead.
By Susanne Retka Schill | September 23, 2013

The 2013 corn crop is likely to present harvest and quality challenges, but it will be most welcome after last year’s drought-reduced production. By all reckoning, it will be a big crop—though not as large as initially projected—and, after the hot, dry August in the heart of the Corn Belt, some states' prospects for bin-busting crops weakened. 

While the final crop numbers were still a moving target at press time, the wet, late spring resulted in uneven tasseling, signaling uneven maturity at harvest. “It’s a very uneven crop,” says Bruce Babcock, the Cargill endowed chair of energy economics at Iowa State University. “It’s going to be a late crop and it’s going to take a lot of propane to dry.” There is likely to be plenty of bushels, however, he adds. 

With many reports of uneven stands in important corn production areas, the team with Genscape LandViewer sent soil consultant Randy Darr trekking across the Corn Belt this summer to take a closer look. In an early August webinar Darr said the 2013 crop looked tremendous.  “However, it is the 6th of August and not the 6th of July. It would be perfect if it were a month earlier.”  Northern Iowa and southern Minnesota experienced the biggest issues with late seeding, while the bright spots in his midsummer trip were Indiana and Ohio.

Then, the weather turned dry once again. Darrel Good, agricultural economist with the University of Illinois, reports the average precipitation across Indiana, Illinois and Iowa in August was the lowest since records began in 1895. The same sort of rationing that occurred after last year’s severe drought reduced the total crop to 10.78 billion bushels is not likely to occur. “Assuming that the size of the market is near the USDA projection of 12.675 billion bushels and that year-ending stocks can be reduced to about 6 percent of consumption, the crop would have to be less than 12.7 billion bushels to require rationing. If the harvested area is near the forecast of 89.1 million acres, the U.S. average yield would need to be less than 142.5 bushels to produce a crop less than 12.7 billion bushels.” Indeed, in its September report, USDA upped its projected average corn yield to 155.3 bushels per acre for 13.845 billion bushels total, saying good yields in the South would offset reductions elsewhere.

In early September, though, the LandViewer team was more pessimistic, forecasting 12.69 billion bushels. LandViewer was developed by University of Illinois’s Steffen Mueller and Ken Copenhaver, who worked with NASA on satellite-based remote sensing technologies for agriculture. Algorithms are used to bring together satellite imagery with weather data to apply 27 data points such as growing degree days, night time temperatures and ground-truthing to assess crop development for projections. The team aims to provide ethanol producers with real-time information on crop prospects in a facility’s corn draw area. Right now, USDA’s projections are generally given as national numbers and state and county data isn’t available until months after harvest.

Late, Wet Quality
While the corn supply should not be an issue this year, the quality may be. The 2013 crop is being compared to 2009.  “That was a wet crop and the quality was really bad,” recalls Babcock. “The problem this year is there isn’t much old crop to blend it out with.” 

In 2009, damaged corn with low test weight didn’t have a significant impact on yield, ISU corn quality expert Charles Hurburgh told Ethanol Producer Magazine, but did mean more spoilage in storage. In fact, low-test-weight corn can be lower in protein, translating into higher ethanol yields.  The late, wet crop that year also increased vomitoxin levels, which were important to monitor closely lest they got concentrated in the distillers grains above acceptable levels. In 2010, the National Corn-to-Ethanol Research Center did a study of corn damaged by mold and excessive heat during drying, using samples of 2009-’10 season corn supplied by Illinois River Energy LLC.  The 100 percent undamaged corn yielded 3 percent more ethanol, or about 0.08 gallons per bushel. Using 8 percent damaged corn, the maximum allowed for No. 2 corn, resulted in a 0.014-gallons-per-bushel yield decrease while 22 percent damaged corn, the maximum for No. 5, added up to a 0.032-gallons-per-bushel yield loss. The study showed that, up to a certain point, it didn’t hurt to utilize damaged corn as an ethanol feedstock—as long as the plant purchased it at a discounted rate, said NCERC researcher Sabrina Trupia, in reporting the research results. As the mixture reached 50-50 ratio, however, it did start to matter.

Monitoring the quality of more adequate corn supplies will be a most welcome change among corn producers who either ran out of local corn last year, or watched the basis swing widely. Basis is the spread between a local cash price and the futures, a number that in normal times is under the Chicago futures price to reflect transportation costs, although it also indicates local demand. In central Illinois, Good says the basis swung as much as $1, from 50 cents under, when looking at the January 2012 cash price compared to July 2013. “By June of 2013, that basis was 50 cents over.”  

Demand Driver
The market dynamics dominated by 2012’s drought-reduced crop illustrates several shifts occurring in the corn market, with long-term implications. In past short crops, Good says, rationing happened in the domestic feed and residual market segment, which reduced its corn use while export use stayed strong. This past cycle, it was the export sector that drastically reduced consumption, turning to other countries around the globe with growing corn supplies, while domestic feed and residual consumption surprised many by staying relatively strong.   

With the new crop expected to be fairly large and the global corn crop expected to set a new record, “prices will be at the mercy of demand,” Good says. While the average farm price will likely be higher than expected in midsummer, the sharp increases seen in the previous year to ration supplies won’t likely be necessary this year. 

Reviewing each demand sector, Good reports there’s talk about expanded broiler and hog numbers in response to the prospect of lower corn prices. “Maybe we can get feed consumption back up to the 5 billion-bushel-level, which we haven’t seen for four years.” That, it should be noted, doesn’t include distillers grains, so it would actually be a much larger expansion in feed demand. 

Exports will rebound, he continues, having dropped to about 700 million bushels during the marketing year just ended, the lowest level in 40 years. “It’s hard to pin down where exports will be, bigger than last year, but not to where we were at,” he says. “We got accustomed to 1.8 to 1.9 billion bushels; USDA is expecting 1.2 at this point,” he says of the August projections.

U.S. corn producers can expect more global competition in corn exports going forward. “When, in the early '70s, commodity prices moved higher, we did see the world expand corn acres quite a bit,” Good recalls. “When prices dropped, those acres didn’t go away. In 2005-’06 we saw another bump up that didn’t disappear and the expectation is that current acres won’t go away either.” Global corn producers are much like U.S. farmers, he adds. “If corn goes back to $4, we’ll still probably plant all of our land. We won’t leave anything idle.” 

After growing quickly for the past five years, corn use for ethanol production is leveling off due to reaching the blend wall. “We saw ethanol use backtrack this year. We’ve exported less ethanol and drawn down inventories, but we haven’t reduced domestic consumption,” Good says in summarizing the year. Looking ahead, he says, “We’ll see an uptick next year.  We won’t draw down inventories much further and we expect a modest increase in E85.” 

Bullish on Ethanol
Babcock is more optimistic about the potential for E85 consumption to grow. If corn prices stay low and gasoline prices stay high, E85 should be attractively priced. He’s bullish on the future of ethanol, too. “If crude oil stays at $90 to $100 a barrel, I think there’s a market for all of the corn ethanol that we can produce,” he says. “You have to get the cost of production down first, and it sure looks like we’re headed that way.”

“I think the American farmer has demonstrated repeatedly over time the ability to outproduce the market,” Babcock continues. “I believe the long-term trend for corn prices is lower, just because of that proclivity. There’s lots of production possibility in other countries and U.S. farmers can produce a lot more.  The strategy corn farmers ought to be looking at is to create more demand base through flex vehicles.”

Growth in feed demand is limited, he explains. “People are reducing their beef consumption, which is a big user of corn, and dairy consumption isn’t growing. Meat consumption in China is primarily pork and chicken, and that’s a steady, but slow-growing market. History has shown that corn producers outproduce their market, so I’d be focusing on ethanol market development.”

With west Texas intermediate crude oil prices at $106 for October as of mid-August, and corn likely to be around $4.50 to the upper $4 level, Babcock says, “that’s a signal to produce all-out on ethanol. I think when the new crop comes in, the ethanol plants are going to be running and making some money. And, I think the export market will be bright.”

He stresses that the price advantage opportunity when corn is cheap and crude oil is high is going to drive ethanol production higher. “I think in the next five years, if the United States isn’t going to expand ethanol production, somebody else will. I’m thinking Brazil and Argentina, and perhaps coarse-grain-for-ethanol in eastern and central Europe.  You can’t have cheap grain and very expensive petroleum. You can’t do it. Someone will take advantage of that, take the arbitrage opportunity and make some money.”

Author: Susanne Retka Schill
Senior Editior, Ethanol Producer Magazine