Grain Supply and Demand

We talked here about food prices just two weeks ago. As you might have been hearing, commodity prices have gone up still more since then. Corn, which was around $6.50/bushel when we wrote on June 6, reached $7.60 last Monday, June 16, and trades this morning at about $7.20. Floods in the Corn Belt region are a major reason and we'll come back to that later. Rice hovers right at $20/CWT (hundredweight = 100 pounds) about where it was on June 6 and off its peak of nearly $25 in late April. Wheat, which we didn't mention last time, is $8.69/bushel this morning; it pierced $9.00 during last week, but is off from a high of $12.72 in late March. By comparison, wheat traded around $3.50 from 2002-2005. All of these are futures prices on the Chicago Board of Trade for the most active "nearby" contract. The "CBOT" is the world's leading agricultural commodity market.

How long prices can stay at these extraordinary levels depends on the origin of their recent surge. In all cases, rising demand from consumers in emerging markets is playing some role, reflecting the interaction of better diets and higher incomes. This might be termed a "structural" shift, and while we applaud their higher standard of living, it will give prices an upward bias that is likely to be sustained.*

Weather Has Hurt Crops; Recovery Foreseen
On the other hand, a more transitional force can come from weather as it impacts individual crops. This was true for wheat over the last few years, but that seems to be correcting now. Australia is one of the main wheat exporters, but drought there hurt the harvest for three of the last six years. In the middle, the US and Europe also both had bad crops. Inventories of wheat fell sharply. However, these areas are now all experiencing recovery, along with other growing regions, and the US Department of Agriculture (USDA) projects more sizable wheat supplies following the current US harvest. Supplies of rice have been flat in recent years, but recent USDA estimates suggest steadier expansion may be resuming. The release of export bans in several countries should also ease supplies for users elsewhere.

Corn is presently buffeted by both supply and demand factors. The now receding Midwest floods struck the two biggest corn-producing states, Iowa and Illinois. A report from USDA due next Monday, June 30, will include a preliminary estimate of the hit to effective acreage from the flood; estimates of the crop planted had already been decreased a bit due to inclement weather in May, just when planting was supposed to be taking place. Fortunately, last year's US crop was enormous, contributing to record world production. And current USDA projections show foreign production continuing to expand in the current crop year. Major corn growers include China, Argentina, Brazil and the Former Soviet Union. Exports are notable from Argentina, Brazil, the Ukraine and South Africa, besides the US.

Ethanol Adds Pressure
The corn demand situation is complicated by the increasing use of the grain for bio-fuels ethanol. As we noted last time, ethanol is anticipated to absorb 30% or more of the corn crop presently in process, or 4 billion bushels (101.6 million metric tons). This amount is almost double the volume from the 2006 crop and 33% more than in the 2007 crop. The entire US crop is estimated at about 38% of the world total, and US ethanol usage alone would absorb 13% of the total world production.

The USDA's expectation is that some of the supply of corn for ethanol will come from the amount allotted for animal feed, which would be cut sharply, from 6.15 billion bushels (156 million tons) last year to 5.15 billion (131 million tons) from the new crop. A least some of the shortfall in feed grain is expected to come from increased use of sorghum and of wheat, the latter helped by a projected increase in US production, noted above, that could be the largest amount in 10 years.

Assuming this pattern of grain usage substitution, the Agriculture Department projects that US consumption of corn will be the same from this year's crop as it was from last year's crop. This seems to us a somewhat conservative forecast for consumption, although we haven't previously monitored USDA data consistently. You can bet we'll be doing so with great regularity in coming months to see how these expectations play out. As it stands, even under these conditions, US domestic consumption would be larger than its production, limiting exports and putting inventories of corn by this time next year at the lowest in the US since 1996 and the smallest world total since 1984.

Yields Could Be Helped, Possibly Even in US
One other point we want to make about world grain supplies. We mentioned last time that supplies can be increased by more planting and by better farming methods that raise yields. As we've examined these agricultural numbers lately, one aspect that stands out is the wide variation in crop yields around the world. As an example, for wheat, China and Europe are the leading producers; last year, China got 4.76 tons per hectare harvested (hectare is the metric land measure; 1 equals 2.471 acres) and Europe, 4.84. By contrast, the US was at 2.72, India at 2.69 and the Former Soviet Union (Russia and 11 other countries) a mere 1.95 tons per hectare. Certainly land quality varies considerably and likely accounts for a good part of these differences. But planting and cultivation methods also make great differences. And, to be blunt, we're surprised at the US figure and have to believe that Kansas prairies (our own home territory) could do better than this.

In one approach to raising yields, the recent Food and Agriculture Organization (FAO) conference on food security discussed a Second Green Revolution. The First Green Revolution occurred in the 1960s and 1970s and featured hybrid seeds and better insecticides and fertilizers. About moving forward from here, we like the reasoned approach of a recent Christian Science Monitor discussion (June 3): "[the first green revolution] relied too much on the assumption of cheap oil and on farmers' ability to afford expensive pesticides and chemical fertilizers. The easy gains in productivity were also based on building massive irrigation systems. A smarter revolution will need to consider many more variables, such as global warming, new types of nonpetroleum energy, and better ways of watering (such as drip systems)."

While none of this sounds simple, today's high prices and spreading hunger should help get us started in the right direction. Clearly, there's much more to consider, especially including governments' equally widely varying agricultural policies. We've been so concerned for so long about the minutiae of consuming and investing, but all at once, we're refocused on what's really basic: having enough to eat.

*European Commission, Directorate-General for Agriculture and Rural Development. "Issues paper on high food prices", Staff Working Paper. Brussels: May 6, 2008.