Negative Impacts of the 2012 U.S. Corn Shortage


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•Conducted a thorough analysis of changes in domestic and international flow of trade as a result of the 2012 U.S. corn shortage.
•Demonstrated the 2012 drought impact on consumer product pricing.
•Developed written presentation opposing a U.S. increase in ethanol blend rates.

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Negative Impacts of the 2012 U.S. Corn Shortage

  1. 1. Introduction United States agriculture is currently under the most severe and extensive drought in at least the last twenty-five years, and arguably ever. As a result, corn crops are not yielding the bushels that producers or consumers expected and therefore cascading negative impacts in sectors of our economy from fuel prices to the livestock sector. It is important to analyze corn because it is without a doubt the largest component of international coarse-grain trade, accounting for three-quarters of total volume in recent years (USDA 1). The United States is the world’s largest producer and exporter of corn, with the Corn Belt states contributing to 1/3 of the overall crop (USDA 1). Meaning, any slight changes in supply can have a profound effect on both domestic and international prices. Newly found uses of corn have manifested high global demand for the crop and, in response, motivated American farmers to plant the largest corn crop ever this year (Jonsson 2). The United States was supposed to be up to the neck in corn this fall, with favorable planting conditions supporting high-planted acreage couple with expectations of record production. However, Mother Nature had different plans. She presented one of the nastiest droughts to date, with the majority of the impact hitting the Corn Belt states. What was so detrimental to the crop was the fact that the drought came at the worst time possible. The severity of the drought increased in early July, which is a critical time for crop development. As presented in the table below, the share of farms under severe or greater drought increased from 16 percent of all farms to 43 percent from mid-June to mid-August. The total amount of crops exposed to these conditions increased from 16 percent to 50 percent over this same period of time (US Drought 3). Farm Sector Exposure to Drought, Summer 2012 Percentage experiencing severe or greater drought Percentage of: June 19 July 17 August 14 Farms 16 40 43 Acres of Cropland 20 51 57 Value of Crops 16 43 50 Value of Cattle 21 56 67 Values are percentage of national total. Source: ERS calculations based on 2011 data from the Agricultural Resource Management Survey (ARMS) and county-level U.S. Drought Monitor data reflecting drought status as of August 14, 2012. According to the USDA, as of mid-August 2012, 60 percent of farms in the United States were experiencing drought. Of this 60 percent, 17 percent were in counties that were under moderate drought; 15 percent were in counties under severe drought, and 28 percent were experiencing extreme or exceptional drought (US Drought 2). Actually, 80 percent of all agricultural land experienced drought conditions this year (US Drought 2).
  2. 2. The true severity of this year’s drought can be seen in the USDA’s continualworsening outlook in corn yield as the year progressed. The National Agricultural Statistics Service (NASS) reduced corn production estimates by 27.5 percent from May to November, reflecting considerable reductions in crop yields per harvested acre. On May 20th, NASS reported that over 75 percent of the corn crop was rated good to excellent. By September 30th, only 25 percent of the crop was rated good to excellent with 50 percent rated poor or very poor (US Drought 5). At planting time this year, suggested corn yields were to average a record 166 bushels per acre. That estimate was lowered 20 bushels per acre in July, another 22.6 bushels per acre on August 10th, 0.6 bushels per acre lower on September 12th, yet another 0.8 bushels on October 11th, and finally raised a small 0.3 bushels per acre in November. When all was said and done, 122.3 bushels per acre was the forecasted yield, the lowest since 1995. As of November 4th, 95 percent of the corn crop was already harvested, compared to the previous five-year average of only 71 percent by this time. At the start of the season, corn production was supposed to reach 14.8 billion bushels, but now estimates point to a lower number of 10.7 billion. Total corn supplies were forecasted in the November 9 WASDE report at 11.8 billion bushels, which would 13 percent below last year’s supply. Finally, the price per bushel of corn for the 2012/13 marketing year was forecasted to fall within a range of $6.95-$8.25, which is the highest price range ever in nominal terms (US Drought 6). Although the Corn Belt states were hit the hardest, some areas of the country were able to produce some impressive yields. For example, the average acre in Illinois is projected to reap 98 bushels, a 24 year low. On the other hand, production in North Dakota jumped 80 percent and Mississippi yielded a record high. Although this is encouraging, these “diamonds in the rough” are not enough to offset the drought elsewhere in the country. These astounding numbers, coupled with the understanding of the United State’s critical role in the supply of corn, a great deal of change can be expected to manifest itself not only domestically, but internationally as well. Changes in the flow of grain can help us better understand some of the consequences that this drought has brought along with it. Changes in the Flow of Grain Due to the severely limited supply of corn in the United States, markets cannot be expected to behave the same as they have in the past. As mentioned above, although some states suffered greatly from this year’s drought, others were able to build up a fair amount of supply. Occasionally, Corn Belt states import corn, but this level is unprecedented. For example, Alton Grain Terminal in Hillsobro, North Dakota only sent one of it’s ten shuttle trains, loaded with four million bushels (or 1% of the state’s crop), to the Pacific Northwest. Usually all of this terminal’s corn is shipped to Asia. Rather, the remaining nine shuttle trains were rerouted to Decatur, Illinois and St. Louis, Missouri and other Midwest destinations (Ingwersen 2). Some southern states are shipping barges of corn up the Mississippi River to the middle of the country, reversing the normal trade flow. This unusual grain flow could be warning that a rush for quality corn supplies will
  3. 3. be upon us in the coming months as end-users try to deal with the smallest United States harvest in six years (Ingwersen 1). However, thanks to crop insurance, many farmers have protected themselves against this crop failure. As reported by the Bureau of Labor and Statistics, United States’ export prices for corn rocketed almost 128 percent above the 20-year historical average. Exports prices also hit the highest level since the import and export price index series began in December 1984 (Adonizio 1). Unlike farmers in the United States, the ones that are really hurting are developing countries reliant on corn imports and their poorest citizens, who often use more than half of their income to buy food (Wise 1).Global food supply is dependent on United States corn because it is used for food, animal feed, cooking oil, and even motor fuel. Higher prices and a decrease in supply mean that poorer, import-reliant countries may not be able to restock their food supply. In all, it is estimated that the global grain supply is down 180 million metric tons. Dan Basse, president of Ag Resources, said “The poor in the world are going to see tremendous pressure on their budgetary expenditure for calories. This has become a very scary situation, particularly for those in the world who are impoverished” (Jonsson 1). We can use historical data to model and guess what is likely to evolve due to the increased prices. During the price spike of 2008, the least developed countries imported $26.6 billion of agricultural goods, but only exported $9.1 billion, causing an agricultural trade deficit of $17.5 billion for these countries. Deficits bring about a whole mess of problems including squeezed government budgets, limited foreign exchange reserves, and further exposing the poor to food price increases. Even net exporters are not safe. In Uganda, heightened international corn prices eventually maneuvered it’s way to local markets, leaving the heavily corn based consumption country to be labeled as “food insecure” (Wise 1-3). As presented in the figure below, the major difference from the drought of 2008 and today is the shift in how corn is used; domestic feed and residual use is on the decline and ethanol use is on the rise (Adonizio 2).
  4. 4. Although United States production of corn is critical, it is not a monopoly; these unfortunate countries understand that other opportunities and strategies exist to combat rising import costs. Those countries have the ability to implement internal policy changes that adjust prices or the availability of competing products. Corn is generally not the only feed option; wheat, nongrain feedstuffs, and low-protein content meals can also purchased as a substitute for corn. Of course, this flexibility is constrained by types of animals fed, local preferences, and import tariffs and laws. Import countries may switch suppliers of the same grain based on price, quality, availability, credit, or other trade services (USDA 7). The United States recognizes this position and implements ways to maintain their export levels by promoting and facilitating the purchase of United States feed grains in foreign markets. First, the Export Credit Guarantee Program, finances United States agricultural exports by guaranteeing repayment of private, short-term credit for up to three years. Next, the Market Access Program (MAP), helps in the creation, expansion, and maintenance of foreign markets United States agricultural products. Finally, the Foreign Market Development Program, also creates, expands, and maintains long-term export markets for United States agricultural products (USDA 11). There is no denying, however, that this abnormal year will have a profound impact on our exports. Exports are projected to fall to 1.3 million bushels, compared with the estimated 1.55 billion this and 1.83 billion from last year (High Corn 1).Price changes to this degree tend to have a big impact not only on the flow of trade but also on the prices of other commodities that are dependent on corn as an input. Prices of Related Goods With current corn prices being 21 percent higher than they were a year ago, for what products can we expect to see a change in price (Rapier 1)? According to the USDA, retail food price changes are expected to react increased corn costs in 2013. However, animal-based products such as beef, pork, poultry, and dairy could show an increase in price as early as the end of the fourth quarter this year. Packaged and processed foods including cereal and corn flour will likely not see the effects of increased corn prices for another ten to twelve months (US Drought 1). Historically, the Bureau of Labor Statistics correlates a 50 percent increase in corn prices with an increase in the Consumer Price Index (CPI) by 0.5 to 1 percent. Over the last twenty years, retail food price inflation has averaged 2.5 to 3 percent each year. Next year, expect to see an increase in this average with price inflation expecting to be in between 3 and 4 percent (US Drought 2). Drought induced, high feed prices are going to likely restrain growth of United States cattle and hog breeding herds along with poultry and milk production. This is causing feedlot operators to pay lower prices for cattle to offset high feed costs and reduced availability of pastures; predicting to keep cattle prices at the mid to upper $140 range for into 2013 (US Drought 8). Some producers are starting understand these supply squeeze relationships already, by booking corn from Brazil in order to pay a smaller input cost (Ingwersen 1). There are also ways to capitalize on an opportunity like this. As
  5. 5. Shawn Hackett of Hackett Financial Advisors said, “you may want to make room in your freezer for meat because prices for beef and pork are expcted to drop in the next few months as farmers slaughter herds to deal with the high cost of grains that are used in livestock feed. However, everything from milk to salad dressing is going to cost more in the near term, and eventually the meat deals will evaporate as demand outstrips supply” (Tahmincioglu 1). To better understand the true cost drivers of the corn by-products, it is useful to comprehend how much of an input is needed to produce one unit of output (with a bushel of corn equaling 56 pounds of shelled corn). The average steer is fed 20 pounds of corn a day for 160 days before being slaughtered, totaling 3,200 pounds of corn. The steer will provide, on average, 600 pounds of beef, which means it takes about 5.3 pounds of corn to produce a pound of beef or a little over nine percent of a bushel. At $8 a bushel, there is $.72 of corn in one pound of beef. A hen eats about one-eight of a pound of corn a day, or 46 pounds a year. This is equivalent to four-fifths of a bushel, or about $6.51 worth of corn. During this time, the hen will lay about 250 eggs. Hence, the cost per egg comes out to be about two and a half cents. In order to raise a hog for pork, 448 pounds of corn is needed for feed and this will yield 210 pounds of pork. About 1.1 pounds of corn is required to make a half-pound of bacon or about 16 cents worth of corn. Cows require 12,810 pounds of corn and will produce roughly 5,814 gallons of milk during her lifetime. This equates to 2.2 pounds of corn per gallon or about 32 cents in a gallon of milk. With these analytics it is easy to understand the true value coming out of a change in the price of corn.