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Corn: Market Outlook

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USDA Feed Grains Baseline, 2004-13

The gross domestic product is expected to grow both in the United States and around the world, raising incomes and boosting demand for meat. A growing livestock industry will need increasing supplies of feed grains. Bans on methyl tertiary butyl ether (MTBE) in some States are expected to boost the use of ethanol in gasoline to comply with Clean Air Act requirements for oxygenate in gasoline. Most ethanol is made from grains, creating an increasing use for feed grains. Estimated net returns for corn are expected to be more favorable than the other feed grains. As a result, acres planted to corn are forecast to increase slightly but sorghum, barley, and oats acres may decline. The effect of these changes, as well as other factors, on the U.S. feed grains sector are evaluated in preparation of USDA’s baseline projections.

Each year, USDA updates its 10-year projections of supply and utilization for major field crops grown in the United States, including feed grains (see Overview of the USDA Baseline Process. The commodity projections are used to forecast farm program costs and to prepare the President’s budget. One key use of the projections is as a “baseline” from which to analyze the impacts of potential policy changes affecting U.S. agriculture. This discussion summarizes the analysis underlying the feed grains baseline projections for 2004-13. Details about the baseline projections for the U.S. macroeconomy, other U.S. crops, U.S. livestock, the U.S. agricultural sector, and global agricultural trade can be found in the Agricultural Baseline.

The U.S. feed grain sector is expected to face a period of firm growth throughout the baseline period as growing economies throughout the world encourage consumption of livestock products. Ethanol for fuel will also boost corn use and, to some extent, sorghum use. Corn will continue as the feed grain of choice, because of rising yields, especially in the United States. Sorghum, barley, and oats will continue as specialty crops and their acreage will decline.

Increased global demand for meat is expected to boost world consumption of feed grains. However, production constraints, especially limited area, will keep many traditional importing countries from expanding production as rapidly as use, boosting global coarse grain trade from 105 million metric tons in marketing year 2004/05 (October-September) to 133 million in 2013/14. Most of the growth is in corn trade, up from 80 million metric tons in 2004/05 to 103 in 2013/14. Moreover, the U.S. share of corn trade is expected to increase from less than 60 percent during 2000/01-2002/03 to 70 percent by later years of the projection period. Global barley trade is also expected to expand, from less than 16 million metric tons in 2004/05 to over 20 million by the end of the baseline, but U.S. barley trade is expected to remain small. Sorghum trade is expected to decline from about 7 million metric tons to 6 million during the baseline period because of reduced imports by Mexico, which shift to corn. Other coarse grain trade is expected to stagnate over the baseline period, with a small increase in oats trade offset by reduced rye trade.

Supply

Supply is limited by the amount of land available for planting and by yields of the crops.

Corn Acres to Increase. The number of acres planted to corn is expected to total 79.5 million in 2004 and increase to 81 million by the end of the baseline. Corn plantings are influenced by expected net returns for corn relative to competing crops. Net returns are determined by yields, costs, and prices. However, the number of acres available for crop plantings is limited. If more water were available for irrigation, additional land could be brought into production, but that is not foreseen. As a result, feed grains compete for acres with other crops.

U.S. feed grain area and yield

Among the feed grains, corn has the highest net return above variable costs. Soybeans are the major competitor with corn and had returns above corn from 1996/97 through 2001/02. Net returns for soybeans are expected to be below net returns for corn throughout the baseline period, due to lower relative prices caused by increased plantings in South America.

Net returns for various crops

There are benefits to growing crops that may not be reflected in a single year’s cost and returns analysis and; thus, expected net returns do not explain all planting decisions. Maintaining rotations is an important objective for most farmers. This provides numerous agronomic benefits and may outweigh decisions based only on price signals. Soybeans and corn work well in rotation because many of the insects that attack one crop do not bother the other crop. Many corn farmers alternate annually between corn and soybeans. Corn is heavily fertilized for large yields and carryover fertilizer benefits soybeans in the following year. Likewise, soybeans can fix nitrogen on their roots if the seed is inoculated prior to planting (a dust containing the nitrogen-fixing bacteria is added to the seed after cleaning). Carryover nitrogen from this process benefits the following corn crop. Before genetically modified, herbicide-tolerant soybeans became available, corn in the rotation was preferable for greater weed control.

Corn Yields Continue to Rise. For the baseline analysis, yields for corn were determined by calculating the trend growth in yields since 1960. As a result of these calculations, corn yields are projected up 1.8 bushels per year over the baseline period. Increases in corn yields have been driven by continued improvements in plant genetics and equipment, along with other advances such as better targeting of fertilizer needs.

U.S. corn area and yield

A similar analysis was performed for the other feed grains, but their growth is considerably slower than corn. Sorghum yields are expected to increase by 0.4 or 0.5 bushels per year. Barley yields are projected up by 0.6 bushels per year, while oats yields are up 0.4 bushels per year.

Demand

Demand for feed grains is derived from the demand for feed, which is derived from the demand for meat, milk, and eggs.

Macroeconomic Growth Indirectly Affects Feed Grain Use. The baseline assumes that U.S. gross domestic product (GDP) growth improves in the near term (increasing to 3.3 percent in 2004 and 3.5 percent in 2005) as the economy continues to recover from the economic slowdown in 2001 through early 2003. U.S. growth then returns to a longrun sustainable rate near 3.0 percent in 2006. Ongoing U.S. technological advances associated with computing and telecommunications will provide support for worldwide economic growth throughout the 2004-2013-projection period. As the U.S. economy recently has been showing solid demand growth in technology investment, other economies are expected to follow.

A similar pattern is expected for global economic growth, with sustained gains projected in the longer term for most countries. Despite modest European growth expected in 2004, most of the world will be moving much closer to normal economic growth with trend rates in 2006 and beyond. The modest expected decline in real (adjusted for inflation) oil prices in 2004 will give an extra boost to Asia and its manufacturing sector, which is far more dependent on energy for GDP growth than more developed economies.

Selected growth rates of gross domestic product (GDP), by decade

Definition of country groups

As economies expand, consumers shift to more meat in their diets and this requires more feed grains for meat production. Diets in the United States already have adequate quantities of meat, but an expanding economy will keep meat consumption brisk. Internationally, expanding economies are likely to change their diets, especially in developing economies. As a result, the baseline analysis expands world trade in feed grains and increases exports from the United States.

Estimated global meat production

Livestock Products to Increase, Boosting Feed Grain Use. Except for beef early in the baseline, production of U.S. livestock products is expected to increase during the baseline period. (The baseline projections were completed prior to the presence of bovine spongiform encephalopathy (BSE, or mad cow disease) in an adult Holstein cow in Washington State in December 2003.) U.S. beef production is expected to be down in 2004 because of reduced cattle numbers in prior years and low calf crops. In addition, with normal weather, heifers are likely to be held back to rebuild the herds. The combination of low calf crops and replacement heifers will also reduce beef production in 2005 from 2004. Beginning in 2006, beef production will increase from 2005 and continue increasing through the end of the baseline period. As increased numbers of cattle go on feed, more feed grains will be needed to finish the cattle.

Domestic livestock and poultry production

Pork production in 2004 is expected to be about even with 2003, and then begin increasing in 2005. The greatest gains are forecast for 2007 and 2008 at 1.8 percent per year. Production may slow during the remainder of the baseline period, but still increase nearly 1 percent per year. The increase in hog numbers will necessitate more feed, primarily corn.

Broiler production is projected to increase throughout the baseline period. With beef production down in 2004 from 2003, broiler production is expected to be up 2.5 percent; then, growth slows to about 2 percent per year during the remaining years. Thus, feed needs for the broiler industry are expected to grow during the baseline period.

Feed needs for turkey and egg producers are also expected to increase during the baseline period. Projected turkey production is expected to be up about 1 percent during the period, with production growing 1.6 percent in 2004 and 2005, then slowing to 0.9 percent at the end of the period. Egg production is projected to increase 1.7 percent in 2005, then slow to about 1 percent.

Milk production is projected to increase slowly, around 1 percent in the early years of the baseline, then rise to near 1.5 percent in the out years. Cow numbers are expected to continue their long-term decline throughout the baseline period. Production gains are the result of increased production per cow. As a result, feed needs are likely to increase.

Ethanol Use Continues to Grow. Corn used for fuel alcohol has grown sharply since the early 1980s. As a result of this growth, fuel alcohol has become the largest component within the food, seed, and industrial (FSI) use category; the volume of total FSI has overtaken corn exports in recent years. Corn’s use in fuel alcohol depends on the interaction of government incentives and policies, technology development, corn prices, prices of coproducts from ethanol production, and prices of energy substitutes.

Ethanol production expanded very rapidly until marketing year 1995/96 (September-August), when there was a major contraction due to tight corn supplies and record high corn prices. Since then, ethanol output has rebounded, especially since methyl tertiary butyl ether (MTBE), a competing oxygenate produced from methyl alcohol, was found in U.S. groundwater and policies have encouraged ethanol use.

Policies are very important for the expansion of ethanol production. In 1998, the U.S. Congress extended the federal tax credit of 54 cents per gallon for ethanol blending, which was scheduled to expire in 2000, to 2007, but specified 1-cent reductions in 2001, 2003, and 2005 to settle at 51 cents. The bioenergy program helped boost ethanol production in 2001 by providing payments for additional production, thereby reducing input costs for plants that expanded output. The 2002 Farm Act extended this program through fiscal year 2006. However, the biggest factor underlying the recent expansion has been the adoption of ethanol by California, the nation’s largest gasoline market, after it prohibited the use of MTBE. The need to ramp up production to meet mandated use has boosted production, especially since New York and Connecticut have also banned MTBE. Ethanol is the principal replacement oxygenate for those States that use reformulated gasoline, requiring 2-percent oxygen by weight.

Policy-influenced market conditions are also critical determinants of ethanol production. More than half of all fuel ethanol is blended into conventional gasoline as a fuel or octane enhancer. Prices of ethanol relative to gasoline prices are a key component for determining how much ethanol is blended. The remaining ethanol is used for blending into reformulated gasoline which will be important in California, New York, and Connecticut. It is also used in oxygenated gasoline for the winter carbon monoxide program. (A program that requires the use of oxygenated-gasoline for designated winter months. The intent of the oxygenate is to offset the increased CO2 levels emitted from gasoline engines due to hard starting and lengthy warm-up periods in cold weather).

While use of oxygenates largely results from mandated clean air requirements, fuel producers can choose among competing oxygenates based on their relative prices. Some States offer incentives that also influence demand for ethanol. For instance, Illinois has a sales tax exemption for ethano, while Minnesota has mandated a year-round minimum oxygen content requirement for all gasoline sold.

Baseline Projections for U.S. Feed Grains Supply and Use

U.S. feed grain supplies and use are expected to increase over the baseline period.

Most Production Gains Expected from Productivity. Feed grain production increases throughout the projection period, as yields account for most of the expanded production. Corn is expected to gain in share of total feed grain production and use. Corn area is projected to experience minor growth over the baseline period. Sorghum plantings are expected to decline slowly, while planted area for barley and oats declines slightly. Net returns for sorghum, barley, and oats are nearly constant during the projection period, while net returns for corn increase.

U.S. feed grain supply

Throughout the baseline period, total feed grain use is projected to set new records. Exports are expected to grow about 50 percent from the 53 million metric tons in 2003/04, a much more robust growth rate than the past two decades. By 2009, exports are projected to surpass the old record set in 1979. Improved growth in global imports is expected and U.S. feed grain exports are expected to encounter reduced competition throughout the projection period.

U.S. ending stocks of feed grains are projected to move in a narrow range throughout the baseline period, between 38 and 34 million metric tons. These ending stocks are below the average ending stocks in the 1990s of 41 million metric tons or the average ending stocks in the 1980s of 85 million metric tons. The 1980s were characterized by large stockholding due to government programs. Prices are expected to remain well above loan rates. Productivity is projected to account for most of production growth, with the remainder coming from increased plantings.

U.S. feed grain utilization

Corn Supply and Use to Grow. Corn area is expected to grow and yields increase, resulting in new record corn production. Use will likely also set records as livestock herds grow, raising feed needs, and industrial uses for corn expand. China becomes a net importer in 2009/10 (see international writeup), contributing to projected exports of U.S. corn increasing throughout the baseline.

Corn prices in 2004/05 are expected slightly higher than in 2003/04, reflecting total use growing slightly more than supply. At the onset of the baseline, domestic corn use is strong, and continues expanding throughout the period. U.S. corn exports are also expected to grow. The U.S. share of global corn trade is expected to increase, mostly because of reduced exports and increased imports by China. Also global corn trade is expected to grow, given rising global meat demand.

Planted area for corn is projected to remain relatively large and grow slowly over the baseline period, as use strengthens and prices improve. Corn competes mostly with soybeans for land and is used extensively in rotations with soybeans. Corn area grows relative to soybean area, as relative net returns are expected to favor corn throughout most of the baseline.

Gains in corn yields are expected to continue over the entire baseline period, facilitated by genetic improvements and farming practices, such as timely planting and effective input use. Corn production is projected to increase, setting new records.

U.S. Corn Supply

Increasing meat production boosts feed and residual use. Feed and residual use is expected to remain level in 2004/05, the initial year, but grow throughout the remainder of the projection period. Level feed and residual use in 2004/05 is due to reduced numbers of cattle on feed. Increasing U.S. meat production and associated livestock (measured by grain-consuming animal units) account for the rising use of grain.

Despite its growth, feed use is not as strong as it would be without coproducts from the production of ethanol. Ethanol wet mills produce corn gluten feed, corn gluten meal, and corn oil as coproducts, while dry mills produce distiller’s dried grains (DDG). The baseline assumes that each 56-pound bushel of corn that goes into dry mill ethanol production results in 17.5 pounds of DDG as a coproduct. The protein content of DDG for beef cattle is about 23 percent, compared to 48 percent for soybean meal and about 10 percent for corn. The energy content of DDG falls between that of corn and soybean meal. Thus, the baseline assumes that the DDG coproduct of dry mill ethanol production substitutes for about a 50-50 split of corn and soybean meal in feed rations, or about 8.75 pounds each of corn and soybean meal for each bushel of corn used for ethanol production.

Ethanol Production Keeps Corn Use High. Food, seed, and industrial (FSI) use of corn is anticipated to increase throughout the baseline period, beginning at a record level. Major growth is expected in ethanol use because many States are banning MTBE and ethanol is its principal replacement. Greater corn use is projected in the baseline as the ethanol industry expands production. In addition, corn use is boosted in the initial years of the baseline by the bioenergy program. Policy is a critical determinant for the quantity of corn used for ethanol and different policies could drastically change the use of ethanol in fuels. Gains for high fructose corn syrup (HFCS) and most other food and industrial components are projected to be smaller than in most of the previous decade. Food and starch, other segments of FSI use, are mature markets and projected gains largely reflect population growth.

Projected exports demonstrate growth compared with the 1980s and 1990s, but remain below the record established in 1979/80 until the middle of the forecast period, when China becomes a net importer. World corn imports grow because of increased livestock and poultry production.

U.S. corn utilization

Ending stocks of corn are expected to decline to around 1,149 million bushels early in the baseline period, then increase. Prices strengthen from lows in the early 2000s to $2.35 per bushel toward the end of the projection period, as the stocks-to-use ratio declines slightly.

U.S. corn price and stocks-to-use ratiio

Sorghum Supply to Expand Slowly. Growth in sorghum production is expected to equal use, resulting in ending stocks remaining about the same. Acres planted are expected to decline, but yields increase. Feed and residual use as well as food, seed, and industrial use (primarily ethanol production) will increase.

Sorghum production is projected to grow to 530 million bushels by 2013. This reflects a slow decline in plantings but trend yield growth of 0.4 to 0.5 bushels per year. Even with the growth, sorghum yields during the baseline period do not exceed 1994’s record of 72.7 bushels per acre.

Sorghum exports decline during the baseline, especially in 2006-08 when reduced tariffs on corn trade with Mexico lead to lower sorghum shipments. With reduced exports, increased feed and residual use are projected. Food, seed, and industrial use rise slowly in the baseline, remaining record high due to growth in ethanol production.

Barley Supplies Increase Modestly. Increasing yields are expected to modestly increase barley production, reaching 290 million bushels by 2013. Planted acreage declines over the period, as barley’s net returns cannot compete for more area. Yield per acre is expected to increase 0.6 bushels over the period, in line with trend increases.

Beer production is projected to increase with population growth, boosting food, seed, and industrial use. Barley feed and residual use remains mostly constant during the baseline period in line with production. Barley exports are projected to be 30 million bushels per year, as shipments of feed barley to the Middle East continue. Imports are expected to increase slightly to 40 million bushels, because of malting barley imports from Canada. The average barley price is projected to rise through the baseline, reaching $2.55 per bushel by the end of the period.

Oats Plantings Decline. Oat imports principally from Canada supplement declining domestic oats production. Slow growth in food, seed, and industrial use, with some rise in feed and residual use, keep ending stocks relatively constant.

The declining long-term trend in oat acreage is projected to continue. The crop will remain important in some rotations and as a cover crop. Production is projected to decline from 130 to 120 million bushels over the period, while total use starts at 226 million bushels, increasing to 242 million. Imports rise from 100 million bushels to 115 million or 33 to 37 percent of supply, making up the difference between production and use. Imported oats are particularly important for food and specialty feed use. Food use grows very slowly reflecting population increases. Feed and residual use ranges from 150 million bushels to 155 million. Oat prices remain constant over the baseline period, as imports supplement domestic supplies.

Baseline Projections for World Feed Grains Trade

The USDA baseline also provides projections for global trends in feed grain supply, use, and trade.

Expanding Consumption to Boost Corn Trade. Increased global demand for meat is expected to boost world consumption of feed grains. However, production constraints, especially limited area, will keep many traditional importing countries from expanding production as rapidly as use, boosting global trade from 105 million metric tons in 2004/05 to 133 million in 2013/14. Most of the growth is in corn trade, up from 80 million metric tons in 2004/05 to 103 in 2013/14. The U.S. share of corn trade is expected to increase from 60 percent during 2000/01-2002/03 to over 70 percent by the latter years of the projection period.

As recently as 2002/03, China was the second largest corn exporter. China, however, is expected to limit exports and gradually increase imports of corn, becoming a net importer by 2009/10. Corn area expansion in Argentina is expected to be limited by profitable returns for soybeans. Area expansion is also expected to be limited in other exporting countries such as South Africa and Thailand. As Eastern European countries like Hungary join the European Union (EU), less corn is exported outside of Europe. However, Brazil is expected to remain a significant net exporter of corn because of attractive world prices and EU demand for corn that has not been genetically modified.

World and U.S. corn trade

China is a key to the future of global corn trade. In recent years, China has maintained corn exports, while reducing stocks when production fell below domestic use. Much of the excess stocks are thought to be liquidated, so future stock declines will be limited because they would likely boost internal prices. Meat demand in China is expected to increase because of strong income growth. Rapid gains in meat production are expected to increase corn feed use. While corn yield growth is projected to rise less than 1 percent per year, area increases will be limited by higher returns for other uses for the land. However, the Northeast is expected to remain a surplus corn producing region and, because it is so close to South Korea—one of the world’s largest corn importers—China is expected to continue to export corn. However, Southern China is further away, and is expected to be an increasingly corn deficit region, boosting imports during the baseline period. So by 2009, China becomes a net importer of corn.

Growth in corn imports over the baseline period is not limited to China. Some markets, like Japan, are expected to reduce imports due to slow growth in meat consumption combined with increased meat imports. But most corn importing countries are expected to increase imports as meat production rises because of limits on corn production growth. The largest increase in corn imports is expected for Mexico, where a switch from sorghum to corn is expected on top of strong growth in meat production. Imports by the rest of Latin America are expected to grow only modestly, at about the pace of population growth. With stronger global economic growth, Egypt is expected to lead the growth in corn imports by North Africa and the Middle East. With limited barley area, and increasing barley exports, Canada is expected to increase corn imports to maintain meat production increases. Russia and other former Soviet Union countries increase corn imports faster than Ukraine increases exports, making the region an increasing net importer of corn.

Barley Trade to Expand. Global barley trade is also expected to expand, from less than 16 million metric tons in 2004/05 to over 20 million by the end of the baseline. Demand for feed barley is expected to grow in North Africa and the Middle East, where production increases are limited by the climate. China leads import growth in barley for malting. EU exports are expected to be only 3.3 million metric tons in 2004/05, compared to over 10 million as recently as 1999/2000. Low stocks are expected to limit the pressure to subsidize EU barley exports. However, EU barley exports are expected to grow to almost 6 million metric tons by the end of the baseline. Barley exports by Australia, Canada, and Ukraine are also expected to increase. U.S. barley trade is expected to remain small.

Sorghum Trade to Decline. Sorghum trade is expected to decline from about 7 million metric tons to 6 million during the baseline period because of reduced imports by Mexico. The current system of variable rate quotas for corn with “cupos” for over quota imports, tends to discourage corn imports and boost sorghum imports that do not have quotas. However, under the North American Free Trade Agreement, the corn tariffs are phased down and disappear by 2008. As corn tariffs are reduced and then eliminated, Mexican feed compounders are expected to shift to corn, away from sorghum. Japan is also expected to reduce sorghum imports slightly as feed grain imports decline.

Other coarse grain trade is expected to stagnate over the baseline period, with a small increase in oats trade offset by reduced rye trade. EU policy is expected to maintain oat production and exports, but a drop in EU rye production (due to reforms of the EU’s Common Agricultural Policy that ended rye intervention prices) and exports is expected. Canada will remain the main supplier of oats to the US market.

Industry Prospects are Good

Yields per acre for feed grains will continue to increase, but corn yields will grow at the fastest rate. Rising corn yields help boost net returns, keeping planted area up. Slower yield growth for the other feed grains makes them less attractive to producers, leading to slightly fewer acres planted over the period. Corn production is up 15 percent over the baseline period, sorghum—because of the effects of a drought in the base period—is up 29 percent, barley up 5 percent, but oats are down 14 percent.

Strong use both domestically and worldwide keeps feed grain prices above loan rates, reducing government farm program costs. Use of corn for corn sweeteners is expected to grow at the rate of population increase. Use of corn to produce ethanol for fuel will continue to climb. Feed and residual use will also expand over the period as livestock and poultry production continue to increase.

Increased global demand for meat is expected to boost world consumption of feed grains. Global trade is expected to increase because many traditional importing countries will not be able to increase production as much as the gains in consumption. Most of the growth in trade is in corn and the U.S. share is expected to increase.

 

For more information, contact: Allen Baker or Ed Allen

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Updated date: March 23, 2004