Worldwide demand for corn has surged, and shrinking stockpiles are unlikely to be replaced due to extreme weather conditions that have destroyed millions of acres of farmland.
Even as corn production rises to record levels this year, it won't be enough to keep up with demand, and prices will climb.
"There is a storm developing in agriculture," Jean Bourlot, global head of commodities at UBS AG (NYSE: UBS), told Bloomberg News. "If we have the slightest disruption in any part of the world, the effect on the price will be considerable."
Global corn production will rise 5.6% this year, but still fall short of demand, according to the United States Department of Agriculture.
In a report on global supply and demand estimates released June 9, the USDA reduced planted corn acres by 1.5 million acres from its March planting intentions survey. The USDA projects U.S. corn production to be 13.2 billion bushels this year - still a record - but down 305 million bushels from the May estimate, creating a bigger gap between supply and demand.
The USDA also reduced its estimate of corn stocks by the end of the 2011/2012 marketing year to 695 million bushels - a 23% drop from its May estimate of 900 million bushels. U.S. stockpiles are down to 47 days of use - the lowest since 1974.
"This is a very, very tight stocks situation," said Todd Davis, crops economist with the American Farm Bureau Federation (AFBF). "We clearly need a big crop this year to build our supply reservoir. Farmers can still make up for planting delays brought on by flooding, but they clearly need cooperative weather in July and August to make a good corn crop."
"Food Fight" Pushes Corn PricesChina, the second-biggest corn consumer after the United States, will use 47 times more corn than it did 10 years ago. That's an increase exceeding the entire corn crop of Brazil, the world's third-largest producer.
Rising meat and poultry prices also have kicked up demand for corn as animal feed. China's pork consumption has doubled and chicken demand quadrupled over the past 20 years, according to the USDA.
Tyson Foods Inc. (NYSE: TSN), the biggest U.S. meat processor, will spend $500 million more this fiscal year on feed costs. Corn and soybean meal account for about 42% of the company's spending. Tyson, like many farmers, has started using more wheat for poultry feed.
Finally, rising energy prices and the push for less reliance on oil has increased ethanol production. The U.S. ethanol industry now uses seven times as much corn for ethanol than it did 10 years ago.
This is the first year more corn will be used for ethanol than livestock feed, and next year the United States plans to convert more than 5 billion bushels of corn into ethanol.
The U.S. Senate last week voted to eliminate $6 billion in federal subsidies that support ethanol production, but that isn't expected to hurt the industry. The Renewable Fuel Standard, which requires fuel companies to blend at least 12.6 billion gallons of ethanol with gasoline each year, will keep ethanol production popular. The mandate will increase to 36 billion gallons annually by 2022.
Some analysts say that corn will remain an affordable oil alternative at any price below $9 a bushel.
"For the livestock industry, the ethanol industry, and the food industry, it's going to be a food fight," John Cory, chief executive officer of grain processing company Prairie Mills, told Bloomberg. "Any kind of weather problems are really going to be a significant problem."
Wild Weather Slams FarmersIf 2011's second half sees weather conditions anything like the first, crop yields could slip even more.
Flooding along the Mississippi River has hurt around 3.6 million acres of U.S. cropland, according to the AFBF. Arkansas has lost about one million acres, with Illinois, Mississippi, Missouri and Tennessee also affected.
In Texas and North Carolina, hot, dry weather threatens corn crops. Inclement weather has delayed plantings in many states, putting crops in danger of September frost.
"There is no doubt that the wild weather year we're seeing is impacting all the crops farmers produce," said the AFBF's Davis. "Drought and floods are taking their toll on cotton, corn, wheat and other crops, and USDA's newest numbers demonstrate just that."
With weather problems likely, Goldman Sachs Group Inc. (NYSE: GS) analysts said last week that forecasts for corn prices could be too low because the USDA isn't pessimistic enough in its estimates for U.S. corn, wheat, and soybean harvests.
Inclement weather is not just hitting U.S. agriculture. China is set to see harsher droughts after experiencing some of the lowest rainfalls in 50 years this season. China's drought has affected 6.5 million hectares (16.1 million acres) of farmland, according to the Office of State Flood Control and Drought Relief Headquarters.
"Extreme events will become more intense in the future, especially the heat waves and extreme precipitations," Omar Baddour, a division chief at the United Nations' World Meteorological Organization, told Bloomberg. "That, combined with less rainfall in some regions like the Mediterranean region and China, will affect crop production and agriculture."
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