Weekly Market Update
In case you haven’t been watching, the price of corn for delivery in July (a futures price set on the Chicago Board of Trade) rose 35% just in the month of April from $216 to $293 per metric ton (or if you like to think in terms of bushels, from $5.50 to $7.45 per bushel). As both a commodity and agricultural product, the demand and pricing of corn can provide interesting insights into whether inflation is rising, why and (if so) what factors are driving it. In this Weekly Market Update, we’ll take a look at the market dynamics for corn, what is driving recent price increases and how this is likely to unfold over the remainder of this year and beyond.
A Quick Primer on Corn
Corn is big business. Last year, approximately 816 million metric tons of corn were grown and harvested worldwide. That is the equivalent of 32 billion bushels and (since a bushel of corn is defined to weigh 56 pounds) 1.8 trillion pounds. And corn is especially big in the U.S. Last year we were responsible for approximately 40% of global production and 55% of global exports, making us the “Saudi Arabia of corn” so to speak. The number two producer last year was China which accounted for 21% of global production but zero net exports (more on this later).
Corn is the single largest agricultural product produced in the U.S. with a total crop value last year of $66 billion. In comparison, soybeans (the second largest U.S. crop) had a value of $39 billion while wheat (the third largest U.S. crop) had a value of $12 billion. And as the table below illustrates, it is a business largely focused on a few Midwest states which dedicate millions acres to corn farming.
of Metric Tons)
Source: USDA National Agricultural Statistics Service and National Corn Growers Assocation
The U.S is not only the world’s largest producer of corn but also its largest market. Last year, the per capita consumption of corn in the U.S. was 2,074 pounds per person. And by the way, that doesn’t count the weight of the cob since corn statistics measure only the weight of the corn kernel—which is where all the value is. You may be thinking “I can’t imagine I eat that much corn” and you don’t (I hope). But if you eat pork, beef or chicken (which are fed corn prior to slaughter) or drive a car with a gasoline engine (where 10% of the fuel now consists of corn-based ethanol) you “consume” corn in these activities too. And because corn has so many (and diverse) uses that course through our economy, it makes this agricultural commodity a valuable one for studying its price and how price changes in corn affect many of the consumer and industrial products we manufacture and purchase every day.
The table below illustrates U.S. consumption of corn by major use over two time frames—last year and 25 years ago in 1985. The time comparison is useful to see which markets and uses for corn are growing and (potentially) exerting a pull on current prices.
|U.S. Corn Supply and Demand Balance||Years||Change|
|Food, Seed and Industrial (FSI) Uses||1985||2010||Change||% Change|
|High Fructose Corn Syrup||8.3||13.1||+4.8||57%|
|Food Animal (Pork, Chicken, Beef) Feed and Residual||104.5||132.1||+27.6||26%|
|Total U.S. Consumption||133.8||291.7||+157.0||118%|
|Plus/Minus: Change in Ending Stocks||60.7||-24.5||N/A||N/A|
|Total U.S. Production||225.6||316.8||+91.1||40%|
Note: Data are in millions of metric tons
Source: USDA National Agricultural Statistics Service and National Corn Growers Assocation
In 1985, the largest category of corn use was as a Food Animal Feed (primarily beef, pork and chicken) where 104.5 million metric tons were consumed. The other broad category of use called “FSI” (for Food, Seed and Industrial applications) was much smaller in comparison with about 29 million metric tons of demand. In fact, direct exports of corn that year were slightly larger than total FSI consumption.
Jumping ahead in time to last year, several things are apparent from the table above. First, every category of corn use has had double digit percentage increases. Second, the FSI category is now larger than the Food Animal Feed category in terms of volume. And third, while every segment of the FSI category has grown, the overwhelming driver of growth has been the use of corn as a raw material for the fermentation of fuel ethanol which is blended with gasoline. In fact, 43% of all the corn consumption in the U.S. last year was as fuel ethanol for transportation. And given the rate of growth of corn use for this market, most experts expect that by 2015, less than half of the total corn consumed in the U.S. will be for its traditional use as a foodstuff. The chart below illustrates this trend1.
Corn and Oil Pricing
Because of the growing use of corn as raw material for fuel ethanol fermentation, its price as an agricultural commodity is increasingly reflecting its value as a blending component for gasoline, and therefore oil price. The chart below plots a 30 year history of monthly oil and corn prices. Until the early part of last decade, there was not a close correlation between these two price series. The primary linkage was that modern farming is energy intensive for machinery operation, and some fertilizers (notably nitrogen compounds) rely upon natural gas as an input to their production. So oil (and energy) prices as a cost input somewhat affected the pricing and (more importantly) the profit margins for corn farming.
Today however, the linkage between oil and corn pricing has become more direct since fuel ethanol is a direct substitute for oil in gasoline. And with over 40% of U.S. corn consumption now directed towards that purpose, corn prices are increasingly reflecting the vagaries of global energy markets, supply and demand, and even geopolitical risk as opposed to growth in demand for corn as a foodstuff for (e.g.) chicken consumption or soft drink demand (where it is used as high fructose corn syrup for a sweetener). A number of consumer interest groups have questioned the wisdom of this outcome, especially given the importance of corn as a nutrient and basic foodstuff for much of the world’s population.
Corn Exports and Imports
As mentioned earlier, the U.S. has been and continues to be the dominant global exporter of corn. The two charts below plot a 50 year history (from 1960 to 2010) of global corn exports and imports by country. The plot of exporting countries illustrates how important U.S. exports have been and how we have been able to maintain a dominant leadership position for so long and despite growth of demand both in the domestic market for corn consumption and growth in the size of the overall export market. This raises perhaps the most impressive statistic regarding the corn industry in the U.S. which is its growth in productivity based primarily on embracing agro-science and technology. Consider that between 1960 and last year, U.S. corn production more than tripled (from approximately 99 to 317 million metric tons) on nearly the same amount of land (82 million acres in 1960 vs. 88 million acres last year). This is a kind of productivity growth statistic normally only seen in high-tech industries such as semiconductor manufacture.
The other aspect of the export chart below is the presence and subsequent disappearance of China (alluded to earlier) as a corn exporter. China remains the clear number two producer of corn worldwide. However, domestic consumption has grown faster than production so that China could become a net importer in the coming years. Unlike the U.S, the primary growth of corn demand is Feed for Food Animals as its farming industry becomes more intensive, more sophisticated and the growing affluence of the Chinese population are driving growth in demand and consumption of pork, chicken and beef.
With regard to global imports of corn, the chart below illustrates how the dynamics of demand have changed over the past 50 years and will likely continue to change. Until the early 1990’s, Japan, South Korea and Taiwan were key growth markets for imports as they (like China today) became increasingly affluent and shifted dietary preferences towards meat products which depend on corn as a feed. Other developed countries were once large importers but have diminished in importance as they have either become self-sufficient in corn production or found substitutes, especially as a Food Animal Feed. Today, the driver of growth for global corn imports is the developing countries worldwide in Asia, Eastern Europe and Latin America. And this growth trend in the chart below as yet does not reflect the potential impact of China should it become a major importer too.
Short-Term Factors Affecting Corn Price
While the recent spike in oil prices—associated with the turmoil and unrest among oil exporting countries in North Africa and the Middle East—have contributed to a rise in corn price based on its value as a fuel component, two other factors are also at play. The first is the recent weather in the Midwest, notably those ten states responsible for over 80% of U.S. corn production. It has been unusually wet which has delayed planting season since farmers risk having their equipment get bogged down and stuck in mud when fields are extremely wet. And a delay in planting can reduce the yield per acre come harvest season. Commodity markets have responded to this news by driving up the futures price for corn as we noted at the outset.
The other consideration is that U.S. ending stocks of corn based on last year’s harvest (not among the best) and high demand are at their lowest in over ten years. One way of normalizing this effect is to calculate the size of the ending corn stock as a fraction of last year’s total domestic demand and exports. This is shown in the chart below (as the bars) over the past 50 years from 1960 to 2010. Overlayed on these bars is the annual average realized corn price in the U.S. for that year. The chart illustrates that low ending stocks as a fraction of prior year consumption and exports have resulted in price rises, just as the converse (high ending stocks as a fraction of prior year consumption) have resulted in price declines. But the magnitude of the recent price increase cannot be explained by low ending stocks alone. Instead, it is the combination of this fact with worries about the late planting and the rise in oil prices over the past six months which have all contributed to the run-up in corn prices.
The title of this Weekly Market Update is “Corn Price Increases Tell a Story about Why Commodity Prices are Increasing”. And the key points we’ve tried to make is that it is a complicated story with many causes. Some reasons are (hopefully) temporary such as the delay in the planting season due to wet weather. Some reasons are linked to monetary policies as a weakening U.S. dollar makes corn exports from the U.S. priced in dollars more attractive. Some reasons are structural in nature such as the world’s growing appetite for corn-based products (food animals) with growing affluence. And some reasons are based on government policies such as the decision to use corn-based ethanol as a major blending component in gasoline both for environmental and energy security reasons.
The temporary factors will undoubtedly be resolved—although it illustrates weather plays a key role in agricultural commodities and pricing over the short-term. And one can plausibly expect the U.S. corn industry to continue to drive increases in productivity and production through new strains of (genetically engineered) corn seeds and crops, perhaps even developing strains particularly suited to fuel ethanol fermentation. However, the structural factor of long-term growth in demand by developing countries (and now possibly China should it become a growing importer) will remain for years and add to pricing pressures. The key wildcard for the U.S. consumer is what role corn will play in the future energy policy of the country—a growing one (likely given environmental and corn industry support) or a diminished one (assuming a technological breakthrough in the use of a non-foodstuff organic source such as algae or switchgrass as the organic raw material for ethanol fermentation.) Either way, in the near-term rising corn prices will be a contributing factor to growing inflationary pressures here in the U.S.
Download a PDF of this post.
1The continued growth of corn-based fuel ethanol manufactured in the U.S. is also dependent on continued government subsidies for ethanol manufacturers, and tariffs on imported sources of ethanol such as from Brazil which built a large ethanol-based fuel industry beginning in the 1970′s.
The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.
You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus or summary prospectus, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.