Analysis: Corn export dominance to bend, not break

CHICAGO Fri Sep 30, 2011 12:14pm EDT

Large fields of corn growing in fields in Otisco, Indiana, August 25, 2009. REUTERS/John Sommers II

Large fields of corn growing in fields in Otisco, Indiana, August 25, 2009.

Credit: Reuters/John Sommers II

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CHICAGO (Reuters) - For the first time in 40 years, U.S. corn exporters are not out-selling the rest of the world.

Domestic ethanol is sucking up record crops. Emerging suppliers like Brazil and Ukraine are taking export share, while traditional exporters like Argentina move to open new markets. And consumers worldwide are looking to save every penny, cutting shipping costs or using other types of feed.

After supplying four out of every five kernels of corn traded internationally in the mid-1990s, U.S. market share was projected to shrink to 45 percent this season, with U.S. dominance particularly hard hit in the past 10 years.

However, that decade-long erosion should stabilize or at least slow as global demand growth may start to outpace steadily rising production outside of the United States, and as demand for corn from the U.S. ethanol industry plateaus.

Still, the stiff competition in a market the United States once dominated appeared to be here to stay.

"Other countries have been stepping up to the plate and improving their exporting abilities, getting phytosanitary agreements in place, and things of that sort," said Sterling Smith, analyst with Country Hedging.

For instance, Argentina, the world's No. 2 corn exporter, is currently working out a health protocol that would allow China, the world's second largest consumer of the grain, to import corn from the South American country.

Argentina, Ukraine and Brazil, the world's largest corn suppliers behind the United States, could see their combined market share grow to 41 percent in the marketing year ended September 2012 from 18 percent a decade ago, according to U.S. Agriculture Department data.

"As foreign production over the past 10 years has grown faster than foreign consumption, our export potential has eroded," said Rich Pottorff, chief economist with Doane Advisory Services.

"The outlook is a little brighter over the next decade than it was in the past decade, but that's not to imply that U.S. exports are going to rebound to the kind of market share we had a decade ago," he said.

PEAK ETHANOL

One big obstacle for U.S. corn exports has been the ethanol industry, seen soaking up 40 percent of the U.S. crop this year, up from less than 10 percent a decade ago. Proximity to crops in the Midwest farm belt often allows ethanol makers to outbid exporters.

That rapid demand growth was seen tempered by 2015 as the Renewable Fuels Standard tops out its requirement for corn-ethanol blending in the U.S. fuel supply at 15 billion gallons, up from 12.6 billion gallons this year.

With U.S. corn production steadily trending higher as science pushes the upper bounds of yield potential, a larger share of the U.S. crop would then be available to livestock feeders and exporters, analysts said.

"Assuming that they don't raise the renewable fuels standard mandate and 15 billion gallons of ethanol is about all we can use domestically, then we've clearly seen the big gains in demand from the ethanol industry already," Pottorff said.

CHINA'S DEMAND GROWING

The next great growth area for U.S. corn demand may now lie half a world away -- in China.

An increasingly affluent population in the world's most populous nation is urbanizing and upgrading diets at an exponential rate, requiring more grain to produce meat, eggs and dairy products. Demand from industrial processors was also soaring.

"With demand from the (U.S.) ethanol sector topping out, China's going to be the next big market factor," said Shawn McCambridge, grains analyst with Jefferies Bache.

"Their string of self-sufficiency in feed grains is slowly declining. If their economy continues to grow and demand for corn-based products such as meat continues to increase, they're going to have to come into the market more aggressively."

U.S. corn prices plunged more than 6 percent to a nine-month low on Friday after the USDA pegged quarterly corn stocks well above market expectations. This revived trade talk of potential large corn purchases by China, although no deals have been confirmed.

China's domestic corn consumption, projected by USDA at 182.5 million tonnes this year, is rising faster than production, seen at 178 million tonnes, according to USDA. Its state stockpile of the grain has been whittled down in recent years and is believed to be at less than a one-month supply.

China, formerly a large corn exporter, imported more than 1 million tonnes of U.S. corn in each of the previous two marketing years and was projected to import at least 2 million tonnes in the current 2011/12 season, according to USDA.

In a Reuters poll on Thursday, analysts on average forecast imports to hit 4 million tonnes. Other forecasts have suggested even larger imports of up to 9 million tonnes this year and 20 million tonnes by 2020.

ACREAGE THE KEY

Whether corn production outside the United States can keep pace with such a jump in world import demand will be the key to determining if U.S. market share continues to shrink, stabilizes, or if it bounces back.

Corn output outside the United States has grown far faster than global demand for imports over the past 10 years, thereby narrowing the world corn deficit that U.S. supplies have traditionally filled.

The deficit of 61 million tonnes in 2001 will shrink to a projected 39 million tonnes this year, according to USDA data.

If foreign corn acreage were to freeze at the current level while yields and demand continue to grow as they have over the past decade, the deficit would rebound to roughly 2.5 billion bushels, or about 63 million tonnes, Pottorff said.

But if acreage continues to grow by the roughly 6 million acres a year as is has averaged over the past decade, along with demand and yield growth trends, that deficit would narrow to 1.4 billion bushels, or about 35 million tonnes, he said.

The reality -- to be determined by market prices, the broader economic climate, global weather and other factors -- lies somewhere in the middle.

High corn prices will keep encouraging output growth, which must come from higher yields in the United States and China as the top growers have little room left to expand farmed acres.

China this week said it would look to boost domestic production, possibly planting higher-yielding genetically modified crops.

Brazil and Argentina were more likely candidates for opening up unused land to corn seeding.

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