World grain supplies are projected to tighten again in this season for the third consecutive year, although oilseed supplies are expected to be slightly more adequate than last season. A dominant factor in the corn outlook is that domestic demand for U.S. corn is poised for a large expansion next season, with around 24 new ethanol plants under construction or in the planning stages. These new plants should add at least 140 to 180 million bushels of new processor demand for corn in the September 1, 2002-August 31, 2003 marketing year, as the industry gears up to replace the gasoline additive MTBE, with an ethanol-based product, ETBE. In assessing the impact on prices, keep in mind that about 1/3 of these bushels will return to the feed market as by-product feeds. Also, early projections indicate Southern Hemisphere feed grain exports from June through next March will be about 250 million bushels lower than a year earlier, which should give a strong boost to U.S. corn exports from June onward. To meet this demand and avoid a sharp decline in next year’s corn carryover, a moderate increase in 2002 corn plantings will be needed. That prospect appears likely to strengthen corn prices modestly in the spring, along with modest soybean price strength. However, barring major weather problems in South America in the next six weeks, strength in the soybean market will be tempered by indications of a large increase in South American production to be harvested this spring.. Wheat prices appear to have slightly more upside potential than corn, with soft red wheat prices showing a little more potential for price strength than other classes of wheat. U.S. soft red wheat export sales and shipments through late December were up 25% from last season, versus a 10% decline for hard red winter wheat produced in the Great Plains. However, upward potential for wheat prices will be tempered by a probable recovery in wheat production in Canada and parts of Europe.

Although a sluggish global economy will temper the strength in corn prices, the USDA January 11 crop estimate points to moderately lower U.S. corn carryover stocks. With prospects for lower stocks, the Iowa marketing year average corn price should be at least 10¢ to 15¢ above that of last season. Note, however, that all, of the decrease in this year’s expected U.S. corn carryover is due to the nearly 4 million acre decline in last spring’s corn plantings. Early indicators suggest some strength in new-crop corn prices from early January levels will be needed if corn plantings are to recover to the 2000 level.

In contrast to corn, the U.S. soybean carryover stocks for August 31, 2002 are projected to rise slightly above that of a year earlier. Rising soybean carryover stocks reflect sharply higher South American soybean production both in the spring of 2001 and in current projections for its 2002 harvest. Also, global demand growth for soybean products is expected to slow after the acceleration it received last season from EU’s ban on the use of animal fats and proteins in livestock, poultry, and pet foods. A similar Japanese ban that began last October will be a positive influence on the demand for soybean meal, but the impact will be much less than the EC ban.

The balance sheets (see web page) show the prospective supply-demand balances for corn and soybeans for this year and next. Columns A, B, and C reflect below normal, normal, and slightly above normal yields for 2002 corn and soybean crops, and modest increases in plantings of both crops.

Cash corn prices may work slightly higher this winter, with more significant strength likely from late March to May as export demand begins to recover from last year’s problems with StarLink^® and as grain trade attention focuses on the prospective 2002-03 supply-demand balance. Soybean prices may strengthen a little between now and mid-February, then weaken in late February and early March as farmer selling increases and foreign buyers shift forward commitments to South America. A normal to slightly larger than normal seasonal rise in cash corn prices appears likely into the spring, although the soybean price increase may be less than normal. Normal increases in Iowa monthly average prices from December to the typical high in May are about 20¢ for corn and 30¢ for soybeans.

July corn futures have offered moderate hedging profits for on-farm storage, but hedging returns for on-farm storage of soybeans are below break-even variable costs. LDPs for both corn and soybeans appear likely to decline in the spring fieldwork season, with corn almost certainly dropping to zero. Some seasonal strength in soybean LDPs is possible in late February and early March.

Domestic corn feeding appears almost certain to remain large, and probably will be a little larger than last season for the fall quarter. Hog, dairy and broiler production appear to be expanding and should more than offset an expected decline from a year earlier in the number of cattle on feed. Growth in corn processing demand will accelerate slightly this winter and spring, with prospects for a much larger increase in 2002-03 when many of the ethanol plants under construction will come on stream. A modest recovery in corn export demand is widely anticipated. However, it has not yet shown up in USDA export sales reports. Outstanding sales and cumulative shipments through early January were 4% below a year earlier. Competition from Canadian and EU grain will be less than last year, and prospects for Chinese competition the rest of the year are uncertain but probably will be down. Many analysts expect China’s WTO entry to shift it from being a large corn exporter for most of the last 17 years to being a net corn importer in most future years. But that prospect is by no means certain.

A wet planting season has sharply reduced corn plantings in South America, thus boosting U.S. export prospects for June through November. But these positive developments appear likely to be at least partially offset Eastern Europe and the Former Soviet Union. Both regions harvested excellent crops last year, and will be able to sharply increase grain exports, as shown in Figure 1.

Export demand for soybeans has been exceptionally strong so far this marketing year, with shipments to date and outstanding unshipped export sales of beans, meal, and oil up 18, 28, and 55 percent, respectively from a year earlier. Oil demand was strengthened by reduced foreign production of high oil content oilseeds including sunflowers, rapeseed, canola, and palm oil. However, export demand for both beans and bean products is likely to weaken substantially from late winter onward, because of increased South American competition. USDA projects next spring’s soybean harvest to increase 10% from a year earlier in Brazil and 6% in Argentina. Much of the increase is expected to come from a shift out of corn. Brazilian farmers sharply expanded corn plantings in 2001, causing severe market congestion as ports tried to simultaneously receive corn and soybeans at harvest time. Memories of lengthy waiting times to unload and the depressed harvest-time corn basis are expected to cause the shift from corn to soybeans. Brazil exported a moderate volume of corn this year, for the first time in several years. Its corn-to-soybean shift, should strengthen U.S. corn exports while tempering gains in U.S. soybean exports.

Another uncertainty in U.S. soybean exports revolves around China’s recently established GMO labeling program. The program slowed U.S. bean exports to China for several weeks in early fall. However, the Chinese government now appears to be implementing the program in a way that will not greatly restrict U.S. exports. China is a very large importer of U.S. soybeans, accounting for 21% of all U.S. soybean exports in the marketing year ended August 31, 2001.

In addition to EU requirements that food products be labeled by genetic type (GMO), several other countries have added or plan to add similar labeling programs. Countries using or planning to use GMO labeling include:

EC-15 (currently using)

South Korea (starting March 1, 2001)

Japan (starting April 1, 2001)

China (starting August 31, 2001)

Saudi Arabia (starting December 1, 2002)

Thailand

Philippines

Taiwan (starting January 1, 2003)

New Zealand

Australia

Malaysia (starting January 1, 2003)

Czech Republic (Starting January 1, 2002)

International trade agreements appear likely to encourage more GMO labeling in coming years. Labeling doesn’t prevent countries from importing GMO corn and soybeans, but provides a mechanism for consumers to reflect their preferences. Labeling also can help determine how much consumers are willing to pay for non-GMO food products. Based on recent court actions, Brazil will remain a major supplier of non-GMO soybeans for at least the next year or two. Trade sources indicate Brazilian corn has been bringing a premium of $0.10 to $0.15 per bushel because of its non-GMO designation. A few elevators in Iowa have been paying a 20 to 25 cent premium for non-GMO soybeans. Elevators that provide non-GMO marketing alternatives are more numerous in the eastern Corn Belt, where grain can be moved directly from farm to barge without going through an elevator.