STRATEGIC ADVANTAGE:
GRAIN INDUSTRY PROFILE
Robert Wisner, Iowa State University
Go back to Supplementary Material
Introduction (or go to Topics )
With major trade agreements such as NAFTA, GATT, and proposed new western hemisphere agreements, U.S. grain demand and prices in the years ahead will be strongly influenced by global developments. World production shifted into a slower rate of expansion in the mid-1980s, due to the sharp reduction in U.S. loan rates, implementation of the Conservation Reserve Program (CRP), long-term land-idling in the European Union (EU), environmental constraints, and major economic changes in the Former Soviet Union (FSU) and eastern Europe.. Global population, however, has continued to increase at a steady rate, and per capita incomes remain in an uptrend in many areas, thus increasing the demand for grain.
World Production, Use, and Stocks (or go to Topics )
World utilization of feed grains has been in a long-term uptrend for decades. Reserve storage programs, except in China, have been down-sized, and largely eliminated to save costs. Lack of reserve supplies creates the potential for extreme price increases in years when global crops are reduced, as the market attempts to ration limited supplies through higher prices. Likewise, lack of organized grain reserve programs could place substantial downward pressure on prices in years of extremely large crops, as the market attempts to encourage increased utilization and avoid large increases in carryover stocks. Changes from this policy are not in sight at this time.
Note that in recent years, variability of global production has increased in response to climatic changes or long-term climate cycles. This also adds to potential price volatility.
Global Exports: Relatively Flat Since 1980-81 (or go to Topics )
World feed grain exports reached a peak in 1979-80, and have been in slight long-term downtrend for nearly two decades. However, the trend has been slightly upward in the last several years. The global picture masks important regional changes, with declining exports to eastern Europe and FSU offset by rapid expansions in the Pacific Rim region and parts of Latin America. Foreign exports vary from year to year with weather conditions. Demand for U.S. feed grain exports fluctuates inversely with foreign supplies and exports.
Pacific Rim: Recent Economic Problems Bring Structural Changes and Risk (or go to Topics )
The Pacific Rim is by far the largest export market for U.S. corn and feed grains and a major market for soybeans and soybean products, normally accounting for about two-thirds of all U.S. corn exports. It is also one of the most rapidly growing market areas in the world. Severe declines in stock markets and exchange rates in much of the region in the fall of 1997 temporarily slowed economic activity and growth in demand for U.S. grains. Responding to these developments, countries in the area are making structural changes in their banking and stock market systems, and are restructuring external debt. Net economic impacts are expected to be a temporary slowing of economic growth, for perhaps a year, with only minor impacts on long-term growth potential.
China: A likely Key to Demand for U.S. Grain (or go to Topics )
For the foreseeable future, China is likely to be a key determinant of U.S. grain and soybean exports. Chinese pork and poultry industries are in a rapid expansion to provide more protein for a large and increasingly affluent population. Its grain yields are low relative to the U.S. (corn yields in the mid-70 bushel per acre range in normal years), and efforts are being made to increase yields. The nation’s cropland base is declining by one to two percent per year because of growing urban demand for land. China has alternated from an importer to an exporter several times in the past two decades. Its rapid economic growth and huge 1.2 billion person population create the potential for very large impacts on U.S. demand for feed grains and soybeans.
U.S. Corn Exports: Highly Volatile (or go to Topics )
U.S. exports of corn and other feed grains have been highly volatile for the past three decades. Year to year variability occurs due to fluctuations in the size of foreign crops, political instability, U.S. and foreign policies, and other factors. Exports have been influenced by such developments as the Mexican peso crisis, the collapse of the former Soviet Union, halting of exports to Iraq and Iran, and the approximately 40 percent drop in swine numbers in Taiwan and 25 to 33 percent decline in the Netherlands’ swine inventory due to disease problems.
The recent economic crisis in the Pacific Rim will affect the future of U.S. corn exports. This area has become the dominant market for U.S. corn in the last decade, and now accounts for about two-thirds of all U.S. corn exports. Sharply falling exchange rates add to the cost of imported corn. Weak stock markets and related financial problems may produce slower economic growth for a year or two, but large populations and low-cost labor suggest the area is likely to remain a long-term growth market for U.S. farm products. Parts of Latin America also are expected to be important growth markets for U.S. farm products in the years ahead, although other exporting nations are negotiating favorable trade agreements with countries in the region and will compete with the U.S.
A decade ago, the Former Soviet Union (FSU) was the dominant export market for U.S. corn. The FSU and its former east European satellites are now emerging as grain exporting nations, although their exports will vary widely from year to year, with fluctuations in crop sizes. In the 1970s and early 1980s, the European Union was the dominant market for U.S. corn. It has since become a major competitor. Some EU nations (Britain and Netherlands in particular) are down-sizing their livestock industries due to disease problems. The extreme high density of livestock production in EU and its relatively high per capita meat consumption suggest it will not be a major growth market for U.S. feed grains in the future.
Domestic Corn Demand: Feed use trending upward with animal numbers and reduced feeding of other grains (or go to Topics )
Domestic corn feeding has varied substantially from year to year with changes in livestock numbers and profitability, quality of the corn crop, and supplies of other feed grains. The long-term trend has been upward, partly due to a long-term downward trend in feeding of oats, barley and grain sorghum. New U.S. agricultural legislation may influence this trend to some extent. Freedom to farm provisions give crop farmers in the Plains states greater flexibility to include soybeans in rotations as a replacement for some barley, sorghum, and wheat.
Domestic Corn Processing Shows Long-term Upward Trend, Interrupted by High Corn Prices in 1995-96 (or go to Topics )
U.S. domestic corn utilization by type, and exports since 1970 are shown in the figure below, along with trends in production and total utilization. Corn feeding has trended irregularly upward, with sizable year-to-year variability in response to corn prices, quality of the corn crop, wheat feeding, livestock marketing weights, and other factors. Production has become increasingly variable from year to year. Corn processing, in contrast has shown a very stable long-term upward trend during the entire period, until 1996 when corn prices exceeded $5 per bushel. Growth of processor demand reflects the development and growth of the corn sweeteners market, which now replaces large amounts of sugar in soft drinks, processed foods, and other applications where liquid sweeteners are satisfactory. A crystalline form of fructose also is available, although it has not replaced traditional cane and beet sugar applications. Some analysts credit the strong growth of the fructose market in part to the U.S. sugar policy which has held domestic prices well above world levels through import controls. It appears that the period of rapid growth in the fructose market is behind us.
Another major source of growth in corn processing has been the alcohol fuels market, including ethanol blended fuels and ETBE, an octane enhancing agent used in gasoline in cities with major smog problems. Competitors in this market are petroleum based. Corn’s competitive position varies with the cost of corn, and also is influenced by prospects for the future of tax benefits for alcohol fuels, as well as air pollution regulations.
Corn processing also has increased in response to growing demand for a number of smaller but still important industrial and consumer products including biodegradable plastics, and absorbent materials used in diapers and for cleaning up industrial spills. Increased consumer health consciousness has helped create a growing demand for corn oil. The future of the corn processing industry depends heavily on government policies and new technology. The sharp downward trend in corn carryover stocks relative to use and a conscious government policy of eliminating government grain reserve stocks makes the processing industry more vulnerable to weather problems and short crops than in the past That is because reserve supplies will no longer be available to the industry when supplies are tight, and corn prices are likely to be much more volatile than in the past. Future policies related to ethanol fuels and sugar also will affect industry growth.
Corn Prices and Government Support Levels (or go to Topics )
U.S. corn prices have been highly volatile from year to year since the early 1970s. In the past two years, with new U.S. farm legislation that eliminates all grain reserves except for a very small wheat reserve, and with full flexibility for farmers to shift land from one crop to another, within-year price volatility has increased substantially. International trade agreements have reinforced the trend toward increased price volatility. An earlier chart showing increased variability of U.S. corn production in the 1980s and 1990s that also has contributed to price variability, and is believed to be related to global climate variability. In Iowa, variability of production appears to have increased in the southeast and south central crop reporting districts, relative to other areas of the state. Weather, U.S. government policy trends, global policies, and growing dependence on export markets suggest that volatility of corn prices will continue to be large in the years ahead.
World Oilseed and Protein Meal Trends (or go to Topics )
U.S. soybeans compete in global markets for protein meal and vegetable oil, along with nearly a dozen other competing products that are close substitutes. In addition, synthetic amino acids provide some competition with soybean meal. Global consumption of oilseed meal has been in a strong uptrend for decades as livestock and poultry industries seek improved feed conversion efficiency through well-balanced rations, and as rising consumer incomes create growing demand for feed ingredients. A short world oilseed crop in 1996-97 (due partly to shifts of oilseed acreage to grains) caused a temporary leveling off of protein meal use. However, the long-term trend almost certainly will be upward, as production moves higher in the U.S., Canada, parts of western and eastern Europe, and south Asia.
South American Soybean Production: Three-Decade
Expansion
(or go to Topics )
Until the past two years, the U.S. soybean production trend has been relatively flat. Freedom to farm provisions as well as price incentives have encouraged increased soybean production in Great Plains wheat areas, as well as in the northwestern Corn Belt where continuous non-irrigated corn has been a common rotation. While Brazilian and Argentine production are much lower than in the U.S., the trend in production in the two countries has been upward since the early 1970s. In some recent years, total soybean and product exports from South America have exceeded those from the U.S. due to much lower domestic consumption. China’s soybean production has been relatively steady for several years, while its demand for protein meal has grown substantially.
U.S. Struggles For Competitive Position in World Oilseeds (or go to Topics )
Through the 19980s and most of the 1990s, foreign oilseed producers have rapidly expanded area and production of oilseeds, while U.S. oilseed area remained relatively constant. Major areas of foreign expansion included western Europe, Malaysia and Indonesia, Canada, and South America. U.S. oilseed acreage has increased significantly since 1996, partly in response to reduced government influences on the area planted to major program crops such as corn, wheat and cotton.
World Oilseed Acreage In A Long-Trend Increase, While Grain Area Declines (or go to Topics )
The expansion in global oilseed area planted
has coincided with a long-term downward trend in world grain
area, but may not be the main cause of the decreased grain area.
Reduced grain acreage has occurred in the U.S. in response to the
Conservation Reserve Program that at its peak idled about 37
million acres of cropland, and in response to a similar but
smaller program in the European Union. Grain area also declined
sharply in the late 1980s and early 1990s in the Former Soviet
Union and eastern Europe, in response to drastically reduced
government subsidies and sharp decreases in domestic demand for
grain. Oilseed/grain price ratios will be a strong influence on
the future global mix of oilseed and grain area planted.
U.S. Soybean Production Begins To Rise, But Shows High Year-to-Year Variability (or go to Topics )
Like corn, there is evidence that climatic change or long-term climatic cycles have contributed to high variability of U.S. soybean yields in recent years. In addition, technological changes such as Round-up Ready soybeans, short-season beans for North Dakota and northwestern Minnesota, narrow-row, and drilled soybeans appear to have increased average yields. Also, soybean acreage has migrated from the southeast to the western edge of the Corn Belt, where average yields are higher, and thus has contributed to an increased U.S. average yield. When combined with the strong growth in demand for protein meal and low reserve supplies, prices for soybeans and soybean meal appear likely to remain very volatile for the foreseeable future.
Asian Economies and U.S. Soybean Markets: Important, But Not Quite as Critical as For Corn (or go to Topics )
U.S. soybeans are slightly less dependent on Asian markets than corn, although Asia is a major outlet for the crop. The largest foreign market for U.S. soybeans continues to be Western Europe, although Latin America and the rapidly growing livestock industry in Canada also are important to U.S. soybean growers.
U.S. Soybean Carryover Stocks Historically Have Not Provided A Large Reserve Supply (or go to Topics )
As the chart below indicates, U.S. soybean carryover stocks have fluctuated widely from year to year with variations in the crop size and foreign demand. However, a government reserve storage program has never been in effect for U.S. soybeans. Thus, phasing out of the Farmer Owned Grain Reserve with 1996 U.S. farm legislation should not have a major effect of soybean price volatility. Price volatility, instead will depend heavily on foreign crop conditions, and especially on the trend in Chinese soybean meal consumption. Most analysts believe it will be very difficult for China to substantially increase its soybean and oilseed production in the years ahead, and very possibly more difficult than it will be for China to increase its corn production.
Emerging Corn and Soybean Technologies (or go to Topics )
Biotechnology offers a number of possible very significant improvements in soybean yields, as well as the ability to tailor crops to the needs of specific types of users. Biotech developments so far appear to be the first fruits of major developments that are still ahead, and will likely lead to a need for identity preservation in moving U.S. grains and soybeans into world markets. Opportunities will occur for investment in new types of processing operations to add value for farmers. Individual producers may find niche markets for a portion of their production, and will need to check profitability, new types of contractual arrangements, and risk involved in growing specialty corn, soybeans, and other crops.
Global positioning systems, yield mapping within fields, ability to vary input applications with computer-managed application equipment, and possible increased need for custom work may accompany technological changes. Rapid improvements in computer information systems for obtaining market information, and in analyzing financial management, risk and profit management choices will make business decisions more complex. New technology may link farmer marketing decisions to various buyers via computers. A shift from government program emphasis on price support activities to partial funding for risk management tools such as new revenue insurance products also will impact producers’ methods of doing business and may create ways of more closely integrating risk-management decisions with marketing and financial management decisions.
Industry Structural Changes May Accelerate (or go to Topics )
Like other parts of the agricultural sector, the grain industry has seen a trend toward increased economic concentration in recent years. Mergers and acquisitions among multinational firms have led to increased concentration in corn and soybean processing, the grain export business, and the farm supply industry. Additionally, concentration has increased in the livestock and poultry industries, which are the largest source of demand for U.S. corn and a major demand source for soybean meal. Grain farms have steadily increased in size, and the age composition of farmers suggests an accelerated increase is likely in the next several years. That, in turn, may require new types of asset ownership, new ways of financing the grain business, a reassessment of investment priorities in land versus machinery and other assets, and new ways of thinking about farm financial management.
A shift from government program emphasis on price support activities to partial funding for risk management tools such as new revenue insurance products also will impact producers’ methods of doing business and may create ways of more closely integrating risk-management decisions with marketing and financial management decisions.
End of Grain Industry Profile (or go to Topics )
Introduction | MRP Introduction
Universities
and Agribusinesses
|Table
of Contents |
or Go to Modules :
1
| 2 | 3 | 4
| 5 | 6 | 7
| 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | Questionnaire
Supplementary
Material