By ANN HINCH
Assistant Editor

WASHINGTON, D.C. — The amount of grain and soybean commodities the United States has on hand, according to one longtime market analyst, is less important than the country’s pace of working through those stocks.
Last week, the USDA further fed speculation of whether 2011 could turn into another 2008 for commodity prices and demand, with its publication of 2010 crop production and stocks reports (see related article, page 6). Dave Hightower, co-founder of Chicago’s The Hightower Report and the above analyst, said attempts to hold down grain and soy prices for consumers could create more problems.

“Millions of people may starve in the next crop cycle if we don’t let prices work,” he said, a nod to criticism that rising futures render food too immediately expensive for the poor.

Dan Basse, founder and president of AgResource Co. in Chicago, said, upon seeing USDA corn stocks estimates, “We somehow need to get the engines of demand rationing working rather acutely.”

He said the ethanol industry is the likely target for demand rationing with higher prices, since cattle and hog producers are already seeing “red margins” and the price of meat is already trying to keep up with the price of feed. To cut ethanol demand, he believes the market price for corn needs to boost to where that industry’s margins are minus 20 percent, in the $6.80-$7.20 range (assuming a $90-per-barrel price for crude oil at the same time). This, he added, would likely drive ethanol demand for corn from 5.1 billion bushels down to below 4.5 billion.

“It’s their job to try to gin the market up; they’re speculators,” said Matt Hartwig, communications director for the Renewable Fuels Assoc. (RFA).
But price rationing isn’t guaranteed, said Dr. Chad Hart, a grain markets specialist with Iowa State University, who pointed out ethanol has been the fastest-growing sector for corn use lately.

“Corn and soybeans are always going to go to the highest bidder,” he said – and corn’s highest value has been for biofuel the last few years. If corn market prices rise, he said demand is more likely to slack from feed use or exports.
There isn’t much of a current market beyond 13.5 billion gallons of ethanol, Hartwig said, and according to the RFA the nation’s capacity as of January 2010 was just a little below that (including idled capacity).

In 2009, U.S. plants manufactured 10.6 billion gallons. Part of this is the blend wall of 10 percent; Hartwig said federal approval of E15 for newer vehicles will take a while to catch on with the public.

He also said one-third of every bushel of corn in ethanol is returned to livestock use in the form of distillers dried grains (DDGs). “If corn gets that expensive, everybody who uses corn suffers,” he said, adding while stocks aren’t as high as hoped, U.S. growers still had a banner year and other grains such as wheat and rice are still in high supply.

So far, Hart sees nothing to “put the brakes” on market prices, but said even growers shouldn’t want them to go too high. “You only want them high enough that people (still) buy your product,” he explained.

Livestock stalled

Right now, Hart sees strong livestock prices on pared-down herds, at a break-even point. “Things aren’t great, but they’re not bad,” he said, adding that Midwest livestock producers are better off than others, since at least they’re geographically closer to where most grain and soybeans are shipped out.
Poultry, he said, is already expanding again, since it takes much less feed to get birds to market weight than larger livestock. The meat profit is not yet great enough for hog and cattle expansion, he speculated.

Shane Ellis, an ISU extension livestock economist, agreed producers aren’t in a position to grow right now. More beef is going on the market in the first quarter of 2011 that will buoy producer income, he said, but continued robust grain prices mean the trend of fewer feeder cattle will continue.

“For the year, we’re going to be down about 2 percent,” he said, adding the tighter supplies will give feedlots an advantage in marketing beef, he explained, even if meatpackers don’t want to pay higher prices.

So far, the value of pared-down herds of feeder animals has gone up to help offset feed costs, but margins are tight and cattle futures are not profitable until December 2011 – and then, he sees them being only break-even. Feedlots also won’t be feeding for heavier animal weights as in the past.

The cattle sector needs to see some profitability for several years in order to expand herd size, Ellis explained; he said it takes four to five times as long for the cattle market to turn around as for hogs, so he doesn’t see an expansion until at least 2014.

In dairy, he said producers need to continue to seek demand in order not to have to trim their herds further. Iowa and Wisconsin producers have a competitive advantage, Ellis said, since they’ve held their herds steady or even increased some while others across the country have pared down.

As for hogs, back in 2010 he said great profit margins were available for a period of 16 months in futures, but that has tightened because the market has not rallied as well as beef. There were a slew of heavier-weight hogs hitting the market in the fourth quarter of 2010, but he projects margins will be tight going into the second quarter of 2011.

Poultry is doing better, Ellis said – but even there, flock expansion will likely be only about 1-2 percent instead of the speculated 2-3 percent.
More acres

“This (crop stocks) report really throws us into the guts of needing nine or 11 million more acres this spring,” Basse said, adding that growers may need to put hay and fringe acres under plow and “think about planting their front yard.”
Of that, he believes two million should be for soy and the rest, for corn. Hightower pointed out continued dry weather in Argentina is likely to cut down on its anticipated corn production. Added to this is cotton making a comeback, also looking for available acres in parts of the country.

Hart said there were fewer acres planted in 2010 than in 2008, so increased growing capacity is already there. Of course, Midwest farmers also planted more wheat this winter than in 2009, Basse said, which may cut down on what’s available this season for corn and soybeans.

In using supply, Hartwig believes biofuel won’t be “demonized” like it was in 2008 for higher food prices. He said those trying to make an honest assessment of the market say oil still has a large influence on food prices. Also, he said at the height of the 2008 “bubble,” market speculators held as many bushels of corn as the ethanol industry used that year, helping drive prices up.

“It could be,” he said of 2011 becoming another 2008, “but I think everybody’s a lot smarter.”