Corn is typically the largest revenue-generating crop in the US.
Its primary use has always been as a source of feed. It is also used in ethanol production, high fructose corn syrup, corn gluten feed, and starch—to name a few.
The majority of the US corn crop is grown in the “Corn Belt” which stretches from eastern Ohio to central Nebraska—with the highest concentration grown in Iowa and Illinois.
The Growing Season
Corn is considered to be one of the more difficult crops to grow. Corn plants are tall and thin, and therefore require a good root structure to support the plant. Top-soil and sub-soil moisture are critical in many stages of development. Therefore, growing corn can be expensive due to the costs associated with irrigation. It is important to note that lack of adequate moisture tends to be more common than excessive moisture. Excessive moisture, to a point of standing water in the fields after planting, can also be detrimental to the final yield.
The planting season takes place in the US from April through early June. Many believe that the odds of producing good yields increase if a significant portion of the corn crop is planted by mid-May. The plant is especially vulnerable to yield loss if it is exposed to extreme heat and dryness during tasseling and pollination— which occurs from early July through midAugust. Improved seed quality and better varieties have reduced the risk of yield loss for corn planted between late May and early June.
The kernels develop during the pollination period, so the early July through early August time frame is considered the most critical period of the growing season. The number of kernels developed has the biggest impact on the final yield. Excessive heat and lack of moisture would be considered bullish during this period for the corn market. Very little can affect the final yield outcome by late August to early September. Some of the risks associated with late yield reduction include early frost, root rot, root worm, and beetles.
Supply and Demand
The primary factors currently affecting the supply and demand situation include the push for ethanol, the value of the dollar and crude oil, and renewed strength in emerging markets.
The exchange rate between the importing and exporting country affects the total cost of purchasing grains. A weak dollar allows consumers to purchase our goods and services at favorable exchange rates, causing the demand for our goods to increase. If the supply situation remains constant, the increase in demand will cause the price to rally. Therefore, the weak dollar over the past decade has contributed to steady growth in export demand which also led to price inflation for food since the mid 2000s. Over a long period of time, inflation impacts our buying power which could further encourage the Fed to tighten monetary policy and strengthen the dollar.
According to the Economic Research Service, “income, population, and the rate of economic growth in importing countries have long been recognized as key determinants of foreign demand for US agricultural products.” This statement leads us to immediately think of China with a population of more than one billion people and a double-digit growth rate. As a result of increased food inflation over the past decade, the Chinese government has lowered import tariffs in an attempt to build supplies and contain the cost of food.
According to the Hightower Group, China is expected to import as much as 15mmt per year by 2015-17. Since the US accounts for approximately 50% to 60% of the world corn export market annually, this trend could support our market for years to come. Argentina and Brazil rank second and third behind the US as leading exporters on the world market, with approximately 19% and 9% market share respectively. Japan, Mexico, and South Korea are the leading importers of corn on the world market.
According to the Energy Independence and Security Act (EISA) of 2007, the US is expected to increase all biofuel sales to 36 billion gallons by 2022. When we think of biofuels, corn is generally the first crop that comes to mind. In 2005/2006, the percentage of US corn used for ethanol was approximately 14% of the total corn crop. Currently, approximately 40% of the domestic corn crop is used for ethanol production. According to Full Throttle US Ethanol Expansion Faces Challenges Down the Road written by Paul C. Westcott at the USDA, there are many challenges that face the ethanol industry. The most notable factor that could limit the demand for ethanol is that “most US vehicles are restricted by manufacturers’ warranties to use gasoline containing no more than 10 percent ethanol.”
To meet this demand, the government is expecting an expansion in plantings and an improvement in domestic sales. It is important to understand that these are simply USDA projections. The profitability of ethanol plants are highly correlated to ethanol prices, corn prices, natural gas
prices, and biofield plant yields. To continue meeting long-term growth projections, the industry must continue to be profitable. It is also important to keep in mind that the ethanol industry will continue to have a much greater impact on corn prices as we move forward than the energy market.
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