The world grain trade is facing its biggest shake up in years as American farmers lift corn planting to the highest level since 1944 to take advantage of surging prices pushed higher by the rising demand for ethanol.
The United States Department of Agriculture reported on Friday night that the increase in corn plantings would be the largest amount seen over a year in a century.
If the weather holds up the result could be a massive corn crop, the biggest ever
The impact will be seen in many other agricultural commodities: the USDA said plantings of soybeans and cotton in the US would be down noticeably but wheat plantings in the US are estimated to rise five per cent in response to the high prices late last year which were a result of drought in Australia, parts of Europe and China.
Corn and wheat futures fell sharply in Chicago on Friday night but traders said a lot of that was driven by hedge funds and other non trade speculators closing out losing contracts.
It seems some speculators misread the market and were caught off guard when it became apparent the size of the US corn harvest would be so huge. Other traders had shorted grain prices late last year in complex deals and took their profits on Friday.
The new prices and the size of the possible US winter wheat crops might not be good news for Australian growers as they finalise their winter crop plantings, but the size of the US corn crop will influence grain process across the board.
Normally news of a rise of this magnitude would be bad for prices and so it seemed on Friday the sharp falls on Friday night. But a look at the USDA’s figures might convince traders otherwise.
The USDA report said US farmers intended to grow 90.5m acres of corn this year which, if it happens, would be the biggest corn-growing area in the US since 1944.
Why has this happened? The doubling in the corn prices over the past year and increasing yields means farmers get more from the grain than from other crops: the surge of demand from the ethanol industry has amplified this situation.
The USDA estimates US demand for corn for ethanol production will rise 50 per cent to 3.2 billion bushels of the possible record total figure of over 13.5 billion bushels.
Corn production in 2006 was more than 10.5 billion bushells. That means there could be an extra three billion bushells produced in 2007, of which 1.1 billion bushells will be due to the rise in ethanol demand.
The USDA said because soybean and corn are quite often interchangeable in parts of the Midwest and South, farmers have dropped beans to go with corn because corn prices have all but doubled over the last year.
Cotton growing in the US states of Arkansas, Louisiana and Mississippi will be impacted as farmers sow more beans. That will be welcome news for Australia’s cotton growing industry which is battling low returns caused by the impact of drought forcing production cuts.
Cotton planting in the US is expected to fall to its lowest level since 1989.
But US analysts warn the surge in corn plantings brings to the fore the emerging debate about food-versus-fuel debate: is it right to push more and more arable land away from crop growing for food and into fuel production: it’s a policy the Bush Administration is going to be focusing on over the last 18 months of its life (It was an important part of Bush’s State of The Union Speech in January).
World grain crops, especially wheat, are at historically low levels because of drought, rising demand, stagnant production and average yields. The rise in US wheat plantings of its own will not be enough to ease the pressure on world stocks.
Not only has the rise in corn prices caused food riots in urban areas of Mexico, it also has lifted meat prices because the feedlot industry has been forced to pay more forfoods.
And with soybean prices being forced higher by the effect of the rise in corn and wheat prices over the year, another source of protein for the meat industry has been made more expensive.
Now there’s going to be further upward pressure on soybean prices (and the prices of its products) from the drop in plantings. And the prices of other seeds will rise as a result: canola is in rising demand here and Europe as a source of biodiesel, setting up a rising confrontation with the food industry.
But analysts say that Brazil and Argentina soybean growers (and also wheat in the case of the latter) will have to fill the gap caused by the expected drop in US bean production.
In fact that’s what many analysts think will happen in the closing months of 2007.
According to the USDA, soybean growers in Brazil and Argentina, the two biggest producers after the US, will harvest a combined 101 million metric tons (or 3.71 billion bushels) this year which will lift world stocks to record levels by the end of September.
The US DA believes Brazil’s soybean crop will rise to a record 58.5 million tonnes, topping a February estimate of 56 million tons and the 55 million tons harvested a year ago.
Argentina’s soybean production was estimated to rise 8.6 per cent to 44 million tons from last year’s crop of 42.5 million tonnes.
And the cannier analysts are wondering if the US could be facing a La Nina weather situation as Australia did late last year and in the early months of 2007. If it happens even the higher output from Brazil and Argentina might not be enough to stop a sharp price rises.
If that was to happen then the upward pressure on prices would be dramatic, especially if the US doesn’t ease its ethanol production targets and subsidies if supplies of some grains and oil seeds become stretched.
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What the USDA Reported:
Corn growers intend to plant 90.5 million acres of corn for all purposes in 2007, up 15 percent from 2006 and 11 percent higher than 2005. If realized this would be the hi
