Energy Prices Weigh on Corn Demand

Supply crunch year for corn appears to be the 2007-2008 marketing year. Compiled by staff 

Published on: May 24, 2006

Agriculture will be asked to contribute in a larger way to the energy industry in the coming years. And agriculture's traditional role as the foundation of the food industry will experience increasing competition as more corn is used for fuel, also having a significant impact on the livestock sector, explains Purdue University marketing specialist Chris Hurt.

The greatest fear for livestock producers is that energy prices remain high in coming years, and then a short corn crop occurs in 2007 or 2008, resulting in the need to drastically ration corn usage for feed, Hurt says.

"The corn surplus will be gone with the 2006 crop, as expected total corn use may exceed production by about one billion bushels," says Hurt. "Thus, the supply crunch year appears to be the 2007-08 marketing year." He warns that a weather-related small crop this summer could still bring the supply crunch and much higher corn prices as soon as this summer.

"Both crop and animal agriculture will face exciting new challenges to meet the growing demands that are currently being proposed. The next decade will be an exhilarating period for U.S. agriculture as it seeks the balance between food and fuel uses."

Livestock producers losing feed cost competitiveness

As the largest user of corn and soybean meal, the livestock industry has had the advantage of low-cost feed in recent years. As an example, U.S. corn prices received by farmers from the 1998-99 through 2005-06 marketing years averaged just $2.05 per bushel and hi-pro soybean meal just $180 a ton at Decatur, Illinois.

"The rapid growth of the use of corn for ethanol in the coming months and years means that the livestock industry has a new major competitor, at least for corn," he says.

Feed, Hurt notes, is often the largest single cost factor in the production of beef, pork, chicken, turkey, lamb, milk, and eggs. Livestock feeding has dominated the total uses of corn for many decades, but that dominance has been reduced over time and stands to become less significant in the future.

Looking back Hurt explains that in the 1960s, nearly 80% of the total use of corn was for feeding animals. The export boom of the 1970s added dramatic, new demands and the average feed use for the decade was 67% of total use. Further growth of industrial uses of corn in the 1990s, especially high fructose corn syrup, drove the average amount of feeding use downward to 60% for the decade. Given the now rapidly-growing corn use for ethanol, feed use is expected to drop to about 51% for the 2006 crop.

Americans, both consumers and politicians, are signaling they want to use much more corn for fuel. Market prices of ethanol are currently over $3 per gallon, and ethanol producers could pay near $7 a bushel for corn and still have positive returns. "Futures prices for ethanol today average $2.58 for the coming 12-month period, high enough to pay an average of about $6 per bushel," says Hurt.

Hurt adds politically there is support to stimulate the use of corn for fuel even more. Sens. Richard Lugar and Tom Harkin have recently introduced legislation to move the renewable fuels standard upward to 10 billion gallons by 2010 and 30 billion gallons by 2020. Although corn grain ethanol would be the primary source by 2010, Hurt says the hope is that cellulose-based ethanol would be a large contributor by 2020.

Hurt recalls the scenario that occurred during the time of the 1972 to 1975 export boom, when corn prices moved from around $1 per bushel to closer to $3. "Foreign countries could outbid the U.S. livestock industry for corn and soybean meal, and reductions in meat, milk, and egg production resulted," he says. "During the 1972-74 period, food inflation led the general inflation rate by an average of 3.5%. Once animal supplies were reduced by the mid-1970s - except beef, retail food and farm prices rose sufficiently to stimulate rebuilding animal production into the late 1970s."

Livestock producers should prepare now

Hurt says that the warning the livestock sector should remember is that when feed prices move to a new higher level, that likely will mean an initial period of losses, and sometimes severe losses, as herds and flocks are reduced.

"Then after perhaps one to two years, varying by species, retail prices and farm prices will move higher and positive returns can be generated even with the higher feed prices," he says.

"The strategic message is that managers in the livestock industry need to anticipate such a condition in the coming years, and more importantly, begin planning how to survive the transition years until product prices can eventually cover the higher feed prices."