Ethanol margins, fertilizer concerns supporting corn market

PEORIA, Ill. — Corn prices traditionally tend to peak in late May and then fall off toward harvest, but 2021 was different.

“Corn prices really didn’t break until roughly August. We had some rain forecasts come in that made the market a little more nervous, but when Hurricane Ida hit, corn prices finally broke and started heading down to harvest lows. Even through all of that they still held basically above the $5 mark,” said Todd Hultman, DTN lead market analyst, at the Greater Peoria Farm Show.

“To me, that was a sign that this was a very well-supported market — even at harvest time and a 15 billion bushels crop coming on the way, we could still hold above $5.

“Corn held it together and then energy prices started to creep up. Crude oil broke above $80 a barrel in October, we saw the price of ethanol take off and all of a sudden the ethanol plants has phenomenal profit margins that they could only dream about and they still have those margins right now. That’s really bulled up corn prices recently. That helped rebound cash corn prices across the country.”

The U.S. Department of Agriculture reported last month that $5.77 per bushel corn in Illinois produces $10.37 of ethanol and another $1.56 for distillers’ grain.

From a historical perspective, when ending stocks-to-use ratio is 10%, prices the past 24 years “averaged” at about $4.60 per bushel and ranged from $2.50 to over $6.

“There’s a lot of variation to this, but it gives us a target to shoot for or an idea of understanding fundamentally what should cash corn prices as a national average be in this supply situation. Historically speaking, the answer is $4.60 per bushel,” Hultman said.

“We’re trading $1 above that for two reasons. No. 1 is because we have this fertilizer problem and I think there’s a big concern that corn production outside of the U.S. is going to suffer this year because of the expensive inputs. So, even countries like Argentina or maybe Brazil’s second corn crop will either use less fertilizer, maybe try to get by with no fertilizer or whatever they can do.

“Secondly, the profitable margins in the ethanol industry are also a strong argument for support in our cash corn price this fall. Pandemic or not, I do see that situation being able to continue because I think we’re going to continue to struggle to generate the energy resources that we need and those biofuels are going to be needed.

“This is one of the few times in history, really since the ethanol boom, where outside markets have turned in such a way that biofuels are actually needed again to help provide the supplies we need. That’s kind of the bullish or good news for corn this year.”

Exports Disappointing

Corn exports have been a disappointment as the new marketing year began.

Hurricane Ida struck the Gulf on Aug. 29 and damaged Mississippi River terminals. No corn was shipped for about six weeks while repairs were being made.

“Our corn exports are at 343 million bushels, down 16% from a year ago. My concern has increased as we move forward. China made its big purchases in January and March. So, when we hit that time I think it’s going to show that we’re off more than 16% from a year ago,” Hultman said.

“The good news is Brazil’s crop is lower this year, but Ukraine’s crop is bigger and China has now problems buying corn from Ukraine, so I think that’s what is going to happen in the months ahead.”

The USDA last month projected a 9% drop to 2.5 billion bushels in exports.

“There’s probably some more at risk there, maybe 100 million to 150 million bushels by the time we get to the end of the year, but it’s still very early in the season,” Hultman said.

China’s corn demand is a big question mark.

Up until a few years ago, China produced enough corn to match its own consumption needs.

“They kind of gave up on soybeans and knew they had to import them, but they wanted to at least grow enough corn as they were using. That worked until about five years ago. Their corn production has not increased much ever since, meanwhile their consumption continued to increase,” Hultman said.

“I think we’re starting to see a historical shift where China is losing its ability to produce enough corn to feed and supply its own needs.”

China made large purchases last year, buying 850 million bushels of corn from the United States.

“I don’t think they’ll buy that much from us this year. They’ve bought about 472 million bushels this year from the U.S., but it does look like their production deficit this year is going to be about 830 million bushels. That’s the best guess so far to date,” Hultman said.

“In my view, China is going to increasingly become a bigger buyer of corn in the years ahead. They’ve maximized their arable land potential. They don’t have room to expand like Brazil.

“This year our competition (for corn exports to China) is Ukraine. Brazil’s crop was hurt this year by drought and production was 16% lower. Ukraine’s corn crop that’s just being harvested is going to be up 25%. China is already buying corn from Ukraine and I would be surprised if they don’t buy more.”

Hultman said it really comes down to the known and the unknown in the corn market. Here’s what he said:

What We Know

• Ethanol margins are sky-high at the moment and definitely a strong source of support for corn.

• China’s domestic price remains expensive. Hultman believes China still needs corn.

• South America is off to a good start. They have one problem area in the southern most state of Brazil — Rio Grande Do Sul — which grows about 20% of Brazil’s corn. They haven’t had rain for a long time. They’re in a dry pattern and La Niña is not helping them out. But overall, in both Brazil and Argentina, the early corn crops are off to a good start. The bigger corn crops are the second corn crop in both of those countries and that remains to be determined. There could be a threat of dry weather there from the La Niña influence that they’re going to have to deal with later in the season and also fertilizer prices.

What We Don’t Know

• There is uncertainty of how serious this next pandemic mutant virus is.

• Will expensive fertilizer hurt international corn production? It’s hard to say just how much just yet. Will it hurt our U.S. acres in the spring? So far, Hultman thinks corn and soybean rotations will hold up generally the same as usual this year, but he does think some corn and soybean acres will be lost to wheat, especially in states that were traditionally wheat states in the first place.