Market Matters Blog

Last year’s post-harvest buzz phrase was alliterative, dramatic and dark: Demand destruction.

Cue the Imperial Death March.

Has Demand-Destruction Vader used the Force to squeeze every last drop of demand out of the corn market? Or is his reign over corn usage coming to an end?

He’s wreaking havoc where he can, but he hasn’t choked off all demand. Nor is he likely too, given the size of the U.S. crop and projected usage.

Demand-Destruction Vader’s been trying to control the Cattle Empire using a favorite tool of his: a sweltering multi-year drought that threatened to transform the Southern Plains into Tatooine. Ranchers were forced to sell mother cows, shutting down a swath of the nation’s calf factory. The most recent Cattle on Feed report showed that August placement totaled no more than 1.79 million head, 11% below 2012 and the smallest late-summer placement since the data series began in 1996.

Some ranchers might have postponed placements to take advantage of recently recharged grasses and wait for post-harvest corn prices, but there’s no denying that the diminished cattle herd will take a long time to rebuild. Fewer cattle will need less feed, and that’s the slow, painful tactic that leaves D.D. Vader smirking.

“Can we rebound in demand as quickly as we might have thought at these lower prices?” ADM’s Director of Economic Research Parry Dixon said at a recent soybean meeting.

The smallest cattle herd since the last World War puts a lot of pressure on the hog and poultry sectors to build demand. Dixon expects the hog industry to expand 2% to 3%, but Demand-Destruction Vader’s dirty tricks are at work there too. The porcine epidemic diarrhea virus is claiming the lives of many piglets, and that will likely delay the sector’s expansion until the second half of the year, Dixon thinks. One pork producer I spoke with recently concurs, and thinks it will keep hog prices high through at least December – a signal that encourages producers to keep trying.

The poultry market’s poised to expand, again by 2% to 3%, but Dixon said it needs to find support in the export market if its growth will be viable.

Demand Destruction Vader hasn’t hit the ethanol sector yet, but he’s lobbying the Galactic Senate to scrap the Renewable Fuel Standard. His efforts haven’t come to fruition, but ethanol production isn’t expected to continue its upward trajectory either. It’s hit the blend wall, and demand is likely to be capped at 4 to 5 billion bushels each year.

That leaves exports, the category most affected by last year’s poor crop and record high prices. Brazil surpassed the U.S. in corn exports for the first time last year, and USDA estimates the U.S. only shipped 735 million bushels overseas. USDA expects us to export much more corn this year, 1.225 bb to be exact. For the 2013-14 marketing year, nearly 500 mb of sales are on the books compared to just over 350 mb last year.

Will the U.S. be able to regain the market share we have lost? A lot will depend on how much China buys from the global market this year – it’s already agreed to buy four times what it had agreed on last year.

Dixon said China’s also approved some Argentine varieties for import and could even buy some Ukrainian corn this year, “which could limit in the longer term our ability to be an exporter of additional corn to China. A lot of it depends on what kind of crop they bring in, and how they settle out in terms of prices.”

In the longer term, John Baize, an agriculture marketing and policy consultant, said China could continue to grow its corn imports over the longer term.

“I think we could see China's imports easily rise to 20 million tonnes in the next five or six years, maybe quicker. We underestimated what happened to China on soybeans, and I think we probably are underestimating what could happen on corn as well,” he said at a recent meeting.

Demand-Destruction Vader has done plenty of meddling in the markets. Some of his tactics are torturous and slow. It will take time to overcome the damage inflicted on the cattle sector. Some of his methods were swift, and the export market is already in the process of repairing the damage. The story, like the Star Wars saga, doesn’t end here. Perhaps we ought to look at it as Episode IV: A New Hope.

(ES/CZ)

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