corn plants with tassels closeup Willie Vogt

Tracking the corn market in the West

What drives the corn market, including demand and production factors?

Corn is the most widely produced feed grain in the U.S.; it accounts for more than 95% of total production and use of livestock feed. In the past 10 years, the diversion of nearly 30% of the U.S. corn crop to ethanol production, combined with substantial droughts, reduced the supply of corn. This created high commodity prices that have now stabilized to a lower rate. Today’s lower corn prices are also due to oversupply from three years of favorable production factors and environmental conditions that increased corn yields.

“It’s very unlikely the previous high demand will happen again,” says Steve Koontz, Extension specialist in economics and commodity trading with Colorado State University. “No. 1, there will not be another demand growth like that. We really had a perfect storm of droughts in terms of the number and severity. To increase demand for ethanol, there would need to be a phenomenal growth in gasoline consumption, because ethanol is rarely used in its pure form. It’s mainly blended with gasoline to clean up air emissions.”

Nationwide, over the last five years, ethanol production represented over 25% of corn’s demand growth according to the USDA Economic Research Service (ERS). The drivers of the ethanol market are air-quality regulations of highly populated areas, such as Los Angeles, Seattle or Denver. If a refiner sells gasoline in these areas without a certain percentage of ethanol, the company is fined.

Mark Sponsler, CEO of Colorado Corn, credits ethanol as the most significant market development in the last 50 years. “Ethanol provided a pathway for the replacement of MTBE [methyl tertiary-butyl ether] pollutant in our fuel supply,” he says. “If we didn’t have ethanol as a demand factor, corn prices would be well below $2 a bushel.”

Corn in the West
The irrigation needs of corn moderates corn production in the Western states. Corn is mainly grown for local use — such as at livestock feedlots and dairies. The state of Idaho ranks as the fourth-largest producer of milk in the U.S. with 14.6 billion pounds from 585,000 cows in 2016, according to the United Dairymen of Idaho. This provides a steady market for corn and corn silage.

Idaho farmers find that corn fits well in rotations with potatoes, sugarbeets, alfalfa and mint. In 2016, 18.88 million bushels of corn and 7.05 million tons of corn silage were produced in Idaho as measured by USDA National Agriculture Statistics Service.

“We still don’t grow enough corn within the state to meet the need for it,” says Scott Jensen, Owyhee County Extension educator for the University of Idaho. “There’s quite a bit of corn railed in from the Midwest.”

In comparison, Idaho produces 0.6% of the annual number of corn bushels harvested in the Corn Belt state of Iowa. But for corn silage: Idaho produces 89% of the annual tonnage of Iowa. Idaho averages 188 bushels of corn per acre compared to Iowa’s 203-bushel yield.

When grown in the West, corn requires more inputs than in the Corn Belt. This requires Western corn producers to focus more on return on investment, instead of maximum yield.

“Often the expected yield is as high as the farmer can afford,” Sponsler says, “because the more money invested in a crop to maximize optimal conditions, the more it costs. Then, if the weather turns sour, there is more investment to lose. Many farmers in Colorado don’t shoot for maximum yield, especially with lower commodity prices. Instead, they target maximum return on investment.”

USDA/ERS

The future use for corn is changing, which could alter what users in the West pay. While demand is not outpacing supply yet, experts see that day coming.

Demand for corn
Nationwide, the corn yield per acre has increased more quickly than current market demand. The Energy Independence and Security Act of 2007 did provide a new market for corn by mandating annual sales of 36 billion gallons of gasoline blended with biofuel — generally ethanol at 10% — by 2022. Annual production of pure ethanol was expected to reach 15.8 gallons in 2017 by the U.S. Energy Information Administration. This outpaces domestic gasoline demand and export growth and shows slim margins of growth for more corn.

For many in the ag industry, corn profits are planted on future appetites. “The human population is expected to grow dramatically worldwide,” Sponsler says. “They will all want be fed and clothed. Until demand catches up with quantity, corn producers need to be efficient for economical viability.”

Field corn directly consumed by humans — high-fructose corn syrup, cereals, beverages, starch, sweeteners — combined with industrial uses such as biodegradable plastics, accounted for only 9.6% of nationwide production in 2016, according to USDA ERS. The largest use of corn in the U.S. is livestock feed. It accounted for 46% of the 14,586 million bushels produced in 2016. Corn used in ethanol was 28.9% of that year’s crop.

USDA/ERS


This look at the 2016 marketing year shows the many uses for U.S. corn on a global scale.

Corn futures
“Historically, American agriculture produces far more than is consumed by its population,” Koontz says. “While the population is growing, that doesn’t economically matter. The size of the market is not the number of mouths; it’s the number of wallets.

“We export high-value products, such as meat and fat [cheese], that brings a lot of money into rural America. Any permanent, substantial hit to international trade hurts agriculture. In particular, meat production, and all the things that go into growing meat, like corn and hay.”

While 15.3% of corn produced in 2016 was exported, the amount of livestock fed on corn in the U.S. and exported as meat is staggering: roughly one in five hogs and one in 10 beef cattle. Nearly 25% of poultry raised in the U.S. flies overseas.

As in Idaho, dairy cows across the nation eat corn to produce milk that cures to almost a quarter of the cheese annually consumed worldwide. This was over 5.5 million metric tons in 2016 as reported by the U.S. Dairy Export Council.

For Koontz, it’s not the market for corn that will drive future prices: it’s the demand for soybeans. “There is just phenomenal growth in exports of soybeans,” he says. “It’s almost all going to China for animal feed, mainly pigs. What will matter most over the next 10 years is the economic growth of China. The Chinese will earn more money and buy more meat protein to eat better. In China, that tends to be pork fed on soybean meal.

“To meet demand, I think we’ll see more beans planted in, say, Kansas or Nebraska. Because if you grow corn, you could also grow beans. Except in a lot of areas out West, right? The profitability on beans will be the main driver. That will pull Midwestern acres away from corn, and that might hold up the corn price for Western producers.”

Hemken writes from Lander, Wyo.

TAGS: Crops
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