If people allow themselves to become preoccupied with the enormous increases in grain production in the world, it’s easy to develop a rather somber outlook on where prices are headed. While it would be wrong to suggest that we’re on the edge of a giant breakout in worldwide crop prices, a thorough evaluation of consumption and supply gives us plenty to be encouraged about.
It’s true that North American corn growers have produced the 5 biggest crops in history over the past 5 years and increased annual corn production 5.2 % since 2013’s 13.829-billion-bushel crop (the biggest corn crop ever at the time). However, demand growth is actually outpacing the increase in supply. If you compare 2013’s corn demand of 13.454-billion bushels to 2017’s demand of 14.485-billion bushels, the marketplace has created over 1-billion bushels per year of corn demand (an increase of just over 7 %, over a time period where production has only grown at three quarters of that pace). The fundamentally good news is that the corn market is entering a period where we are seeing carry outs (the ending-stocks inventory) begin to shrink.
Demand could rise up and meet supply. If it were a hot day in the summer and your freezer quit working, it might be surprising how much ice cream you could eat. The fact that for the past decade we’ve been operating in a marketplace with increasing large stocks of relatively inexpensive coarse grains (with the notable exception of the 2012 drought year when grain was neither plentiful nor cheap), it has enabled growth in end-user demand for corn, including a 9 % increase in feed demand and a 7 % increase in corn for ethanol.
There are a couple of long-term fundamentals about the current situation in the corn market which are encouraging for producers.
The first is that the largest portion of the growth in North American corn demand exists within North America. Export demand for American corn hasn’t really changed over the past 30 years. It has ranged between 1.8- and 2.3-billion bushels per year consistently since 1987, and is expected to come in at 1.925-billion bushels for this year’s crop. The fact that exports make up less than 15 % of North American corn demand is good because it protects the industry from political and trade issues which could disrupt orderly international shipping. It also makes North American producers less vulnerable to cheap production in other sourcing regions from taking our end-user demand.
The second positive feature is that both the increase in livestock feeding, and in ethanol production have required significant capital investments. These type of end users are not fly-by-night style consumers who might cease operations quickly if prices move higher. All business operations are susceptible to deviations in price, but these two growing sources of demand are amongst the most stable that the corn industry could ask for.
The North American corn marketplace crossed an important tipping point in 2017 with the increases in demand outstripping the increases in supply. Most projections for 2018 anticipate that this trend will continue. More good news is that we appear to have crossed through the bottom curse of the price cycle, and if the marketplace can continue to reduce ending stocks in the year ahead as demand continues to outrun supply, price fluctuations will become faster and more volatile.
I’d caution corn producers about cracking open the bubbly just yet. Historically it has been a 3-year to 5-year cycle between peaks and valleys in corn-ending stocks and we have no reason to believe that the cycle will accelerate this time. But there is some really important good news in this winter’s supply and demand reports. Demand is out-running production and the growth in demand is primarily by stable domestic consumers. That’s welcome news to corn growers right across North America.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.