The US government has again cut its forecast for crop yields this year. This is on top of a forecast already reduced in August.
On the one hand this might seem not to matter, since the crop is still expected to be the third largest in US history.
But reality is that:
- Use of corn by the US ethanol industry has been growing fast, and ethanol production is now the highest consumer of corn in the US ahead of animal feeds and ‘residual demand’, consuming just over 40% of last year’s crop in the 12 months to 31 August.
- The US is the world’s largest exporter of corn (50% of world trade) and China has just become a net importer.
- In the face of rising demand (domestic and foreign), stocks are expected to fall to “extremely low levels by next summer.”
The world’s largest corn producer is now expected to harvest 12.5bn bushels, down 3.2% on last month’s estimate, which was itself a reduction on a previous estimate.
This matters not only for the domestic market, because the US accounts for 50% of global exports of corn. China became a corn importer last year.
Domestically the US ethanol industry is now the top user of corn. In the year to August 31, ethanol producers will have consumed an estimated more than 40% of the 2010 harvest. (Now slightly more than animal feed and ‘residual demand’.)
“Supplies are extremely tight in the US”, said a senior executive at one of the world’s largest trading houses.
Corn is also used as a feedstock, so higher price inflation can be expected to feed through into the price of pork, beef, lamb, and chicken. “The increased cost of food is somewhere near $30bn in the past year. This has not been passed on to the consumer yet.”
Companies are already scaling back production of chicken owing to the higher feed prices.
And the worst news of all?
Despite the lower estimate, the crop could still be the third largest in US history.
But with hog farms and ethanol producers (40%) driving record global demand, stocks are expected to fall to “extremely low levels by next summer.”