Corn is still the only agricultural commodity with strong supply and demand fundamentals.
Corn stocks are still relatively tight, in fact, the stocks-to-use ratio is about where it was several years ago when corn producers enjoyed record prices. “It won't take much of a weather problem to turn the price around,” said Rich Pottroff, Doane Ag Services. Pottroff provided an outlook for several commodities at the recent meeting of the National Alliance of Independent Crop Consultants.
Demand for corn remains extremely strong, noted Pottroff. “We're looking at use of 10 billion bushels of corn in the coming crop year. And we've never produced a 10 billion-bushel corn crop. Now we need to produce a 10 billion-bushel crop every year for the next few years to meet demand.”
Part of the growth in demand is coming from the ethanol industry, noted Pottroff. “The phase-out of MTBE in California and several other states suggests that demand for ethanol will increase rather dramatically. Clearly, a stroke of the policy pen could turn that around and demand may never materialize.”
If that doesn't happen, total ethanol demand could increase from 600 million bushels to 1 billion bushels by 2005, Pottroff said. “That means we need to plant 2.5 million to 3 million more acres of corn to satisfy that demand. Over the next several years, U.S. corn acreage needs to stay in the range of 78 million to 80 million acres.”
U.S. corn exports are expected to benefit from China's entry into the World Trade Organization. According to the WTO agreement, China will end its export subsidies and will set up a tariff rate quota, allowing it to import corn at a relatively low tariff rate.
“It sounds positive for the U.S. corn market and maybe it is,” Pottroff said. “But it's not going to be all that easy. China did not join the WTO so they could import more U.S. ag products. They joined so they could export more. It's our belief that they will find ways to get around the WTO regulations and will not be a big importer in the near term. They might be in the long term.”
The outlook for soybeans is less rosy, although demand is extremely strong, according to Pottroff. “There has been an 80 percent growth in soybean use outside the United States since 1992. A lot of that has to do with China's market, “but with the country's recent implementation of hard-to-understand GMO rules, it's hard to imagine it's going to help us.”
Included in those rules is a stipulation that all soybeans imported into China after March 20 have safety certificates and a zero tolerance for GMOs. “Even soybeans from Brazil, which claims it doesn't grow GM soybeans, will have to have a certificate.”
As a result, “this spring, we're probably going to see a dramatic slowdown in exports to China and we can only hope that it's temporary and that demand will continue to grow.”
Last year marked the first time in more than a decade that soybean acreage decreased from one year to the next. Said Pottroff, “Over that time period, we've increased soybean acreage by about 16 million acres. Brazil and Argentina have also increased soybean acreage dramatically, with Argentina going up 13 million acres and Brazil, 10 million acres during that time. So those three countries have added almost 40 million acres of soybeans since 1992. Indications are that the expansion in South America will continue at a rapid pace and perhaps even accelerate.”
The bottom line is that the U.S. soybean market is on the verge of a serious oversupply situation. Granted, this is the third year in a row that this observation has been made. But in the first two years, lower-than-expected U.S. yields helped to avert a serious problem.
Pottroff noted that even with normal yields and record demand over the next few years, soybean stocks will continue to build. “And even with bad weather and a lower-than-expected yield of 36.5 bushels in the coming season, we still don't get prices above the loan rate.”
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