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2018 outlook for feed costs: corn

How serious is the possibility that US corn production could undergo a substantial reduction in the coming crop year?

Monday 8 January 2018 (1 months 15 days ago)

As we begin the New Year with much hope and anticipation, one of the key factors which could begin to derail expected profits, especially late in 2018, is the reduction in the global coarse grain and oilseed stocks which are now at near record levels. The abundance of feed ingredients for the last several years has US producers and producers throughout the world beginning to take cheap feed cost for granted. Figure 1. reveals the slow decline and relative flat-lining of all the major feed ingredient costs translating into low and stable total feed costs needed to produce a 270 pound/122.5kg (live weight) pig for US harvest. This amazing run of low prices is contrasted to the feed costs experienced after the 2006 run up of corn prices due to diversion of a critical mass of corn to ethanol production, the speculative commodity run associated with the financial collapse of 2008 and on through the US drought of 2012 which are becoming a distant memory. Since this period of extreme prices and high volatility, feed prices have become almost boring to talk about. Therein lies the danger.

Feed Ingredient Cost Estimated for Finished Swine Marketed Jan 2014-Nov 2017 Iowa State University Estimated Swine Returns, Farrow-Finish
Feed Ingredient Cost Estimated for Finished Swine Marketed Jan 2014-Nov 2017 Iowa State University Estimated Swine Returns, Farrow-Finish

We live in a world where global production and movement of feed ingredients is both commonplace and critical to support global food production and to stave off periodic, regional food supply shortages and even localized starvation. It’s a system that works quite well most of the time. A shortfall in one or two regions can occur with only minor total financial consequences due to mitigation related to trade. However, a major reduction in forecasted US or South American production could send hopes of future livestock profitability tumbling. For the US producer corn prices are the number one concern regarding feed costs since a large majority (percentage) of all total feed fed to US swine is corn.

As a rule of thumb, the US is the number one global producer of corn at about 40 percent of total global production. In the 2016-2017 crop year, true to form, about 37 percent of worldwide production was produced in the US with the next largest producer being China at just over 21 percent of global production. Brazil (8.3 percent), Argentina (3.5 percent) and the Ukraine (2.6 percent) are major powerhouse producer countries with the EU-27 together falling between Brazil and Argentina in total corn production at about 6 percent. The US, Argentina, Brazil and Ukraine utilize less corn for livestock (and other uses) than they produce and are the world’s leading exporting countries. The US is the global leader among this group sending significant tonnage to Mexico, Japan, Colombia and South Korea. Of the top 10 pork producing countries, Mexico and the European Union import each, 9-10 percent of total global corn that is exported.

Worldwide ending stocks of corn remain at historic highs above the 200 million metric ton level as they have since 2014. While use is up worldwide to feed various regional livestock expansions due in part to cheap feed, the stocks-to-use ratio, a measure of “what’s left in the cupboard” at the current rate of use has remained around the 20% range worldwide, a level surmounted beginning in 2014. The US stocks-to-use fell below 10% during the drought of 2012 but now is approaching the same benchmark of 20%, in place globally.

So how serious is the possibility that US corn production could undergo a substantial reduction in the coming crop year? Slim but possible. The upper Midwest wheat belt (North Dakota, western Nebraska and parts of Montana) has been under severe drought since last year, with finger shaped regions of very dry conditions reaching down through southwestern Minnesota and into west central and southern Iowa. Much of that has abated but what is the forecast for the coming year? Producers tend to move crop rotations toward grains with favorable price outlooks but where can they go as surpluses abound? Some are planning to switch to wheat, which has a favorable relative price compared to corn but numbers making the switch are likely to be low and in the marginal production areas near but at a safe distance from where the drought conditions remain. The simple fact is that record global production continues to outpace use and is keeping corn stocks high and prices moribund.

The massive shift to modern pig production in China is increasing the need for corn and drawing down Chinese corn stocks but they have diversified their import sources to multiple countries and are also substituting out corn in livestock diets where supplies are short, and prices are uncompetitive.

U.S. Seasonal Drought Tendency: December 21 - March 31, 2018
U.S. Seasonal Drought Tendency: December 21 - March 31, 2018

The increase in the U.S. swine herd is supporting an increased total livestock demand for corn, which is expected to rise about 2% in the coming crop year. We can observe in Figure 2, the Seasonal Drought Outlook for the current period through the end of March 2018. Except for the impact on wheat production from persistent drought in the western portion of the upper midwest, the major corn production areas look reasonably safe at this time. Keeping an eye on the drought outlook however will be important this year for late 2018 and early 2019. Otherwise, cheap feed seems likely as far as the crystal ball can see.

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