What’s ahead in 2018: Strong ethanol, feed demand stabilize corn market

Source: By Tom C. Doran, AgriNews Publications • Posted: Thursday, January 4, 2018

EAST PEORIA, Ill. — Corn ending stocks have been building for five straight years, pushing down prices, but there is some glimmer of hope on the demand side.

Year-end corn stocks grew from 1.232 billion bushels in 2013-2014 when the season-average farm price was $4.46 per bushel to a projected surplus of 2.487 billion bushels this marketing year and a $2.80 to $3.60 average price.

“Our supply is overwhelming our consumption, and it’s not slowing down. That 2.4 billion bushel carryout this year is going to be hard to get under,” Todd Hubbs, University of Illinois agricultural economist, said at the Dec. 19 Illinois Farm Economics Summit.

“For the foreseeable future, the season-average farm price range (of $2.85 to $3.55) USDA projected the past three months is not going to change.”

Hubbs addressed the various domestic and global factors impacting prices, what to look for in the U.S. Department of Agriculture’s Jan. 12 annual production summary and quarterly grain stocks reports and his two-year forecast.

On Production

That yield in USDA’s November production report came as a bit of surprise to everybody including myself. I would not be surprised if that yield came back a little bit. I sort of hope it will for all of our sakes, but it may not.

Brazil put in more soybeans and shifted more of their corn production to the second crop this year. If the second crop gets in later, it sort of pushes it into their dry season.

I’m going to be paying close attention to the planting date of their second crop this year and what kind of weather conditions they’re having. While they’re not as big of a producer as us, they matter in the export market.

The other thing to watch is what’s currently going on in the former Soviet Union. They have some wet conditions going into harvest and just downgraded their market, so if we’re thinking about exporting into the Middle East or to China, (those conditions may benefit the U.S.).

On Feed, Residual Use

We really need strong feed use this year. With the livestock numbers growing over the last year, I expect a good feed use number. Currently, USDA has it at 5.575 billion bushels. I’ve projected it at 5.54 billion bushels.

What we need to see feed and residual use at about 2.34 billion bushels in the Jan. 12 quarterly stocks report. That would mean we’re on-track to hit USDA’s 5.575 billion bushel projection. Anything below that, then we’re not.

Preferably, I’d like to see it at about 2.5 billion bushels with the number of cattle on feed we’ve had and the hogs out there. It would be nice if we were really eating through corn.

The reason I’m a little bit lower than USDA on feed is there is a lot of distillers grain out there and also when you look at USDA’s grain consumer animal units which tracks livestock numbers for grain consumption, we are at the highest level we’ve been in over 20 years. So, you would think we should be well above 5.575 billion bushels if we’re on track with what we saw in the mid-2000s.

I think feed efficiency has gotten a lot better since we saw those big numbers last time and distillers grain has become a much more prominent part of the ration and that’s what’s eating into corn. So, while we have a lot of livestock out there and while we’re excited about ethanol grind, we get distillers out of that, and that’s moving into the rations in a big way.

On Ethanol

Corn use for ethanol has been the highlight of the fall. We’ve been doing over 1 million barrels a day grind at ethanol plants for two months now. USDA recently raised the number to 5.525 billion bushels for ethanol. I had it at 5.515 billion about three weeks ago, and they just blew right past me.

The Renewable Fuel Standard is basically the same as it was last year. The Energy Information Agency is basically projecting the same gasoline consumption as last year.

Unless we see a jump in gasoline consumption, we’re not going to see a jump in blending. Exports are where we’ve been doing really well on ethanol, and we need a strong ethanol export market this marketing year.

The last marketing year was an absolute beast for ethanol because Brazil had high sugar prices last year and shifted their ethanol production away from sugar and started importing it from us. Brazil imported about 36 percent of all of our ethanol exports for in the 2016-2017 marketing year.

Then on Sept. 4 Brazil put on a tariff-rate quota for ethanol imports. A 20 percent tariff was applied to purchases from the U.S. after a 158.5 million gallon quota is met.

While it’s looking like that might mute some of our exports that we saw last year from Brazil even though they’re still probably going to import double the tariff quota this year, here’s where we need it to come from, and it’s going to happen.

I think China is going to show up and import more ethanol, and they might start importing some corn. We need them to show up and in the next month or two, we’re going to find out if this is going to be feasible.

On Exports

I’m more optimistic on corn exports than USDA is. I think at these prices people are going to start buying despite the data telling me it’s not true. Export inspections are about 42 percent behind the last marketing year’s rate. We are not exporting corn like I think we should or would.

I’m still fixed on 1.95 billion bushels of exports, but if we don’t see our corn export rate pick up in the next month, I think USDA will adjust that number down.

Corn exports to South Korea have been lagging behind a little bit. We export corn to a lot of places like Columbia, even to Central America, but everybody is just down across the board.

The other thing that’s hanging over exports is if we change our trade policy agreements in the next couple of months. That’s sort of hanging over the market.

If we do pull out of the North American Free Trade Agreement, there will be repercussions. It will matter. There will be problems with exports if we do that.

On Ending Stocks

Ending stocks have been building and the stocks-to-use ratio has been building and building rapidly while prices have been declining. Having said that, if we have a production issue, we can eat through those stocks very quickly. It can happen in one year.

But we’re still going to struggle on those ending stocks unless it happens. If we do have a production issue I think we’re right back to where we ought to be.

On Future Prices

I’ve got the average farm price for corn at $3.30 per bushel for 2017-2018. I’m at the high end of USDA’s range. I have sort of a strong belief in corn prices next year. In Illinois, you could probably add five to ten cents onto this depending on where you’re at.

That’s where I think corn prices are going to be, but it’s really contingent for me on that feed use showing up and exports showing up. We see ethanol is there.

I have 400,000 more corn acres for next year at a172.3 bushels per acre trend yield and an average price of $3.40. This is where I see some hope for corn.

If everything falls the way I want it to, we’re going to turn the corner on this building of ending stocks in 2018-2019 and start heading the other direction, even if we don’t have a severe production problem. Hopefully, I’m right about those issues.