Ethanol Helps Stabilize Corn Prices

Uncertainty dampens corn’s potential in 2018. King Corn may soon lose his crown in the US with soybean acreage projected to surpass corn acreage by 2019. Fallout from the Paris Climate Agreement and China’s recently announced ethanol mandate could increase biofuel production leading to lower stocks and increased prices.

While an extreme weather event like drought in Brazil or Argentina can change the bearish forecast on corn prices, year over year yields in 2017 increased by 33.7 percent in Brazil and 1 percent in Argentina. This year, a forecasted 44 million tonnes of wheat from Russia drove the largest stocks-to-use ratio of total grains in over 16 years. Feed grain competition between corn and wheat further contributes to a dismal corn forecast.

Against a backdrop of low hopes for resurgent prices are global developments that might spur corn demand and tighten supplies. An expanding global middle class demanding more animal protein will bolster feed corn demand in the near future. Increased ethanol consumption could also tighten global supply. While not as upbeat as soy or downbeat as wheat, the times are a changin’ for corn.

Global corn developments

The latest World Agricultural Supply and Demand Estimates (WASDE) report validates corn analysts’ fears that prices will remain flat at best for the foreseeable future. December’s release made no changes to the grain stocks. A reported reduction in carryout, or the amount of supply leftover after global demand is satisfied, was due to a projected increase in the use of corn for ethanol production. US corn exports were unchanged while the corn-for-ethanol volumes increased by 2.0 billion tonnes. Because yield projections also haven’t changed, the USDA reported a decrease in carryout from 97.9 billion tonnes to 95.9 billion tonnes.

While the WASDE made no forecast changes over November for corn coming out of Argentina and Brazil, analysts are questioning whether the USDA is underestimating the impact of the dry weather in the two countries. Both countries could experience drought correlated with La Nina. Argentina is already experiencing drought conditions that could affect late-planted corn accounting for 50 percent of total production in the country. The European Union corn stock outlook is being propped up by high Romanian output while corn production has remained relatively stable for several European countries including Russia.

The USDA forecasted China’s beginning stocks for December at 100.7 million tonnes. China continues to take steps toward a free market economy after abandoning a domestic corn price support policy in October 2017. Hoping to match domestic corn demand with greater agricultural productivity, China is banking on massive investment in agricultural infrastructure such as improved irrigation technology, rural development projects, and the reclamation of contaminated farmland. China hopes these investments will help balance domestic corn production and consumption as to minimize its dependence on foreign imports. Furthermore, it’s placing high hopes on Chinese ethanol expansion as a means to satisfy Paris Climate Agreement commitments.

Ethanol’s promise

China announced an ethanol mandate in September to reduce their glut of domestic stocks after abandoning their stockpiling program in October. The USDA predicts Chinese stocks have fallen to approximately 78.7 million tonnes, a drop from 110 million tonnes at the outset of 2016. China is the third largest ethanol producer in the world producing 2 million tonnes of ethanol per year. China will have to produce 15 million tonnes more ethanol annually to reach its goal. The increased production would require 36 additional corn processing plants, 10 of which are planned for construction in the northeastern corn production areas. China has also made a play at Brazil’s corn seed assets through the China-backed Citric Agri Fund’s acquisition of Brazil’s Dow Chemical Subsidiary. Diminishing corn stocks and a well executed bioethanol program in China may spike global corn demand in 2018, creating ripple effects across the market.

Executing such an ambitious program may prove challenging for China as their failed 2004 pilot ethanol program demonstrated. If stockpiles dwindle drastically and domestic crop production plateaus, China will need to look for reliable suppliers such as the United States. US corn could be competitive over that of Brazil as empty cargo backhauls out of US ports could transport corn to China at a favorable price.

Missed ethanol opportunity

While China pushes for more bioethanol production, the United States has chosen to maintain the status quo on renewable fuels. Since the Renewable Fuel Standard was established in 2005, the US has become the largest producer of biofuels in the world with an annual production of 52.2 billion litres. The Renewable Fuel Standard administered by the Environmental Protection Agency (EPA) mandates 10 percent ethanol use in the US and places the “point of obligation” on refineries. The EPA announced on November 30, that it will not raise the minimum 10 percent estimated at 56.8 billion liters for 2018. Refiners frustrated with compliance costs criticize the Trump Administration’s refusal to shift the “point of obligation” away from refiners to marketers and distributors. Such a shift would incentivize more refiners to enter the marketplace, increasing refinery participation from just a few hundred to a few thousand. Midwest growers, upset over this perceived missed opportunity to fuel corn demand, are asking themselves how bioenergy developments will affect their bottom lines.

Trade partner potential

Developments out of Canada have American corn growers optimistic that they will have stronger trade partners within NAFTA. Ontario’s government proposed to double the minimum amount of ethanol blended with gasoline. This will be the first provincially mandated renewable fuel requirement to set a 10 percent ethanol minimum, bringing it on par with the Renewable Fuel Standard in the United States. While Canada’s Ecofiscal Commission, an independent economic policy group, warns this will come at a great cost to Canada’s tax payers, many are applauding the provinces’ efforts to reduce greenhouse gas emissions.

Conclusion

Roaring production has corn analysts worried that barring some major market disruptions, corn prices will remain stagnant into 2018. Global grain competition from booming Russian wheat harvests, advancements in corn seed technology bolstering yields, and Chinese domestic investment in agricultural technology maintains strong downward pressure on prices.

While these worries are well founded, there are multiple factors that point to heightened corn demand on the horizon. Global bioenergy policy-making has the potential to open up trade. There's also a burgeoning global middle class with a growing appetite for meat, poultry, and eggs. Lastly, there's the ever present risk of extreme weather events. As Gro Intelligence monitors corn into the new year, we’ll be ahead of all the developments that could ultimately tip the scales toward a more bullish future for corn.