Bloomberg News

Corn Stocks Plunge as China Adds Brazil-Sized Crop to Usage

June 30, 2011

(Updates prices in fifth, sixth and 21st paragraphs.)

June 20 (Bloomberg) -- Even a fifth consecutive year of record global corn harvests will fail to meet demand for food, fuel and livestock feed, reducing world stockpiles to the lowest in two generations.

Consumption will rise 3 percent in the next marketing year, a 16th consecutive annual gain that saw demand jump 66 percent, according to U.S. Department of Agriculture estimates. Inventory will drop to 47 days of use, the fewest since 1974, the data show. Waterlogged fields in the U.S., the largest exporter, will curb yields, Goldman Sachs Group Inc. says. Corn may jump 36 percent to a record $9 a bushel if conditions worsen, Morgan Stanley says.

Corn purchases are accelerating as droughts and floods limit output gains in everything from soybeans to wheat, driving the Standard & Poor’s Agriculture Index of eight commodities 60 percent higher in 12 months. China, the world’s second-biggest consumer after the U.S., will use 47 percent more than a decade ago, adding an amount greater than the entire crop of Brazil, the third-largest producer.

“There is a storm developing in agriculture,” said Jean Bourlot, global head of commodities at UBS AG in London. “If we have the slightest disruption in any part of the world, the effect on the price will be considerable.”

Corn has risen 5 percent in Chicago this year, even after dropping 7.4 percent last week to close at $6.60 on June 17. Today, the grain settled at $6.605, up 0.5 cent. Prices averaged about $7.02 since Dec. 31, headed for the highest annual average ever. While investors should be cautious for now, “long term, I think $6 to $7 is a normal price,” Bourlot said. Costs are rising for Tyson Foods Inc., the biggest U.S. meat processor, and ethanol maker Archer Daniels Midland Co.

Commodity Index

The S&P GSCI index of 24 commodities advanced 5.6 percent this year, and the MSCI World Index of equities was unchanged. Treasuries returned 3.2 percent, a Bank of America Merrill Lynch index shows.

Global production will rise 5.6 percent to 866.2 million metric tons in 2011-2012, still too little to meet demand of 871.7 million tons, according to the USDA, which combines variable local marketing years for its estimates.

China’s pork consumption doubled in the past two decades and demand for chicken quadrupled, the USDA estimates, boosting requirements for grain-based animal feed. Surging energy prices and subsidies spurred ethanol production, with the U.S. industry using seven times more corn than 10 years ago.

“For the livestock industry, the ethanol industry, and the food industry, it’s going to be a food fight,” said John Cory, the chief executive officer of Rochester, Indiana-based Prairie Mills, which processes corn meal and corn flour. “Any kind of weather problems are really going to be a significant problem.”

U.S. Farmers

Corn fell last week as drier weather enabled U.S. farmers to complete about 99 percent of expected plantings by June 12. A total of 69 percent of crops were in good or excellent condition. Above-average prices will spur farmers to keep sowing even if it means lower yields, Goldman Sachs said in a report June 13. The USDA will release its next acreage and inventory estimates on June 30.

South American producers will also grow more, said Lawrence Kane, a market adviser at Stewart-Peterson Group in Yates City, Illinois. Corn planting starts in September in Argentina and a month later in Brazil.

Demand may not expand as fast as anticipated by the USDA as economic growth weakens. Indexes tracking manufacturing in the New York and Philadelphia regions contracted this month, reports last week showed. Japan entered its third recession in a decade, and the Australian economy shrank the most in 20 years in the first quarter. China raised bank-reserve requirements to a record last week to cool the fastest inflation in three years.

Meat Prices

Livestock owners may cull herds, increasing meat supply, because of higher feed costs. Wholesale choice-beef prices dropped 9.9 percent since reaching a record April 5, and pork is down 2.6 percent from a May 16 high, USDA data show. Bacon retailed at $4.77 a pound in May, 24 percent more than a year earlier, data from the Bureau of Labor Statistics show.

Farmers also may replace corn with wheat in feed, because the grain is the cheapest relative to corn in 15 years. Effingham Equity, a feed and farm-supply company in Effingham, Illinois, will add wheat in hog-feed rations for the second time in a quarter century, said Mark Tarter, the grains-department manager. Tyson Foods is using some wheat for poultry, said Gary Mickelson, a spokesman at the Springdale, Arkansas-based company.

Higher Feed Costs

Higher feed prices will add $500 million to Tyson’s costs in its fiscal year ending in September, Chief Operating Officer James V. Lochner told investors on a conference call May 9. Corn and soybean meal account for about 42 percent of spending to raise chickens, which generated more than 34 percent of sales in fiscal 2010.

Any decline in demand from livestock producers will be overwhelmed by the anticipated jump in Chinese consumption. The nation will use a record 181 million tons in the year that starts Oct. 1, the USDA said in a June 9 report. China’s pork production will reach an all-time high of 52.5 million tons in 2011, while chicken output will advance to 13.2 million tons, the most ever, according to the USDA.

“People just don’t want to give up a better diet once they shift to eating more meat,” said Steve Nicholson, a commodity procurement specialist at International Food Products Corp., a distributor and adviser on food ingredients in Fenton, Missouri. He predicts prices above $8 before the end of the year.

Poor Nations Hurt

While higher prices help farmers, they are “devastating” for the poor in developing nations, Angel Gurria, secretary general of the Paris-based Organization for Economic Cooperation and Development, said in a report June 17. Cereal costs may average 20 percent more and meat 30 percent more over the next decade than in the last one, the group said in the report.

Higher oil prices mean corn would probably have to exceed $9 to trim demand from ethanol producers, said Dan Basse, the president of AgResource Co., a farm researcher in Chicago. The U.S. will convert a record 5.05 billion bushels into the fuel in the next year, compared with 707 million in 2002, the government estimates. Denatured-ethanol futures jumped 64 percent in the past 12 months on the Chicago Board of Trade.

While the U.S. Senate voted June 16 to eliminate a tax credit and a tariff that subsidize ethanol production, analysts said the measure is unlikely to become law and wouldn’t alter demand as long as fuel prices remain high. Also, Congress hasn’t changed the government mandate for renewable fuels, which will rise to 15 billion gallons in 2015 from 9 billion in 2008.

Gasoline Prices

Regular gasoline on average cost $3.646 a gallon at the pump yesterday, 33 percent more than a year earlier, according to the American Automobile Association. Prices peaked on May 4 at $3.985, the highest in almost three years.

“It’s not going to make a substantial difference to the amount of ethanol produced, to the price of corn, or farm income,” Mark McMinimy, the energy and agriculture policy analyst for MF Global Inc. in Washington, said of the Senate measure. “If oil prices tank and corn prices stay near a high, then ethanol production is going to recede to the level of the mandate. But the mandate continues to go up.”

U.S. farmers are contending with extreme weather in several agricultural states. Rain delayed planting from North Dakota to Ohio, and floods damaged crops along the Mississippi, Ohio and Missouri rivers.

Lost Crops

Those delays increased the risk of supply being lost, said Shawn McCambridge, the senior grain analyst at Prudential Bache Commodities LLC in Chicago. Should hot, dry weather in July or August hurt crops, prices may rise to $8.50, he said. Corn planted in wet soil has shallower roots, diminishing its ability to withstand such conditions.

Temperatures as much as 10 degrees Fahrenheit above normal and dry soil from Texas to North Carolina are already threatening yields, according to Michael Cordonnier, the president of the Soybean and Corn Advisor in Hinsdale, Illinois, a crop forecaster. The concern now is that the heat moves north, he said.

The late planting also puts the crop at greater risk of damage from too much rain during the growing season and frost nearer to the harvest in September, said Allen Motew, a meteorologist at QT Weather in Chicago.

This year’s weather patterns are similar to 1993 and 2009, Motew said. Yields rose in 2009 because the summer months were cool and there was no frost before the harvest, he said. In 1993, yields plunged 23 percent.

“July and August will tell us, because the corn crop is made in that period of time,” said Liddell of Rabo AgriFinance, a unit of Utrecht, Netherlands-based Rabobank Groep. “More things have gone wrong than have gone right.”

--With assistance from Alan Bjerga in Washington and Steve Stroth in Chicago. Editors: Steve Stroth, Daniel Enoch

To contact the reporters on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net; Jeff Wilson in Chicago at jwilson29@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net


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