URBANA, Ill. -- This year's corn crop is not big enough to meet the entire consumption base that has been built. Prices will have to be high enough to convince some end users to reduce consumption from current levels, says Chris Hurt, a Purdue University economist.
Can the pork industry compete with other end users?
"The answer is complex and will depend on many factors, including how small the U.S. corn crop is and production in the Southern Hemisphere this winter," he says. "Ultimately, the question is how high corn prices have to be to get a sufficient number of end users to reduce consumption."
The largest competitor for corn in the coming year will be the ethanol industry, for which USDA analysts currently estimate 5.1 billion bushels of corn will be used, Hurt says.
"To meet the mandated domestic Renewable Fuels Standard will require about 4.7 billion bushels with nearly 400 million additional bushels used to make ethanol that will be exported. The 5.1 billion bushels of mostly mandated usage is 39 percent of the 2011 crop," he says.
ADVERTISEMENT
Mandated corn use was troublesome to the animal industries when corn was abundant. Now with short corn supplies, the concerns are even greater, he says.
"Clearly, use of 400 million bushels of a limited corn supply to produce ethanol to be exported to countries like Brazil is far beyond the intent of Congress in the 2007 energy legislation that established the current RFS," he says.
The short corn supply increases the odds that some end users, including the animal industries, will appeal to the EPA to consider exercising the emergency clause to reduce ethanol mandates for 2012, he says.
Cutback from nonfuel sectors
Without a reduction in mandates, the cutback in corn usage primarily will be thrust upon the nonfuel sectors represented primarily by the domestic animal sector and corn exports. There has been a general assumption that foreign customers will reduce consumption as prices rise; however, in 2007 to '08, foreign customers increased purchases, he says.
"Given the low value of the dollar and the strong desire of many foreign governments to do what they can to moderate food inflation, the question remains whether the foreign sector will cut U.S. corn imports this year," Hurt says.
In 2007 to '08, the domestic livestock industry could not pay more than $6 per bushel for corn. That no longer is true, as reduced per capita production in the past four years has increased farm level prices for animal products. Corn prices will have to move to new record highs on a marketing year basis to get animal industries to reduce corn use, he says.
"What are these corn price levels for the pork industry? That, of course, will vary sharply by individual producer, but the current estimate is that producers could pay about $6.65 per bushel based on a U.S. average farm price for the 2011 to '12 marketing year and still meet all other costs," he says.
ADVERTISEMENT
USDA's August World Agricultural Supply and Demand Estimates report forecast the U.S. average farm price between $6.20 and $7.20, with $6.70 being the midpoint of the range, he says.
"The corn futures market is now expecting prices above the $6.70 USDA midpoint and closer to $7 per bushel for a U.S. average price received. Corn prices above $7 per bushel would be required for the domestic livestock industry to cut back on usage," he notes.
Prepared for price uncertainty
Pork producers were well aware of this season's corn price uncertainty and have kept expansion plans on hold. Those decisions appear fortuitous now, he adds.
Estimated farrow-to-finish margins for the 2011 to '12 corn marketing year now appear to be slightly negative, with an average loss of $4 per head. This potential loss is small enough to keep the industry at about the same size. An alternative way to say this is that corn and meal prices above current levels could cause the industry to begin to shift toward moderate liquidation, he says.
Editor's Note: Picklesimer is a media communications specialist for the University of Illinois College of Agricultural, Consumer and Environmental Sciences News and Public Affairs office in Urbana.
