DENVER — The long-term outlook for grains and ethanol is one of “cautious optimism,” according to a new report from CoBank’s Knowledge Exchange Division. CoBank is a $124 billion national cooperative bank serving industries across the United States.
In the report, “2018-2020: Pressure on Grain and Farm Supply Sectors to Persist,” the study’s author Tanner Ehmke describes a scenario in which rising incomes across the world are expected to underpin global demand and create opportunities for U.S. exports in grains, oilseeds and ethanol.
“In the absence of major weather disruptions, global grain surpluses are expected to persist in the near term,” Mr. Ehmke said. “Acreage expansions and improvements to yields in major competing export hubs like South America and the Former Soviet Union will be headwinds to U.S. exports. Renegotiations on trade agreements like NAFTA, which is hugely important for U.S. grain, oilseed and ethanol exports to Canada and Mexico, will heighten uncertainty on the export front just as Free Trade Agreements (F.T.A.s) around the world are enhancing concern about increasing competitiveness in commodities.”
Mr. Ehmke said one of the bright spots during the next few years will be increased demand for global grains, oilseeds and biofuels.
“As the global middle class grows, so will the growth opportunities for U.S. exports,” he said. “The continual expansion of the global middle class is expected to underpin further demand growth for animal proteins and feed grains, and the switch to more Western-style diets in Southeast Asia and Latin America will create export opportunities for quality U.S. milling wheat.”
An expected tailwind might also come from weakness in the U.S. dollar, he explained. As global economies recover it could make U.S. exports more competitive, and rising valuations of currencies among major exporters like Brazil, Argentina, Russia, Ukraine, Canada, Australia and the European Union could be key in the development of the U.S. ag export program, he noted.
In the report, Mr. Ehmke examined several commodities individually, including corn, wheat and soybeans.
In the case of corn, Mr. Ehmke described the demand outlook as “tepid.”
“Corn’s demand trajectory will continue on a growth path in the years ahead, but major expansions in both domestic use and exports are likely to be a challenge,” he said.
Mr. Ehmke said that with domestic demand growth for corn expected to remain lethargic, growth in the industry will be largely dependent on exports. But making a mark in the export market won’t be easy, he said, as competition from Brazil, Argentina and Ukraine ramps up. Argentina, for example, has nearly doubled its corn production over the past five years.
“The combination of anemic demand growth domestically and rising export competition abroad will limit usage increases in the years ahead,” Mr. Ehmke said. “Only major weather events that significantly curtail corn production will have a material change on corn’s current path of domestic supply surplus and global price competition.”
In wheat, the United States continues to battle Russia, which is imposing significant influence on the global export market. Mr. Ehmke said Russia has benefited from a cheaper currency, expanding wheat acreage, rising yields, improving infrastructure and close proximity to key export destinations in the Middle East and North Africa.
“Russia’s dominance in the world wheat market creates an uphill battle for U.S. wheat farmers, many of whom are reducing or eliminating wheat in their rotations in search for more profitable crops like corn and soybeans,” Mr. Ehmke said. “Most recently, wheat was planted to the smallest acreage in the U.S. since WWI, and all-wheat production fell to the lowest level since 2003. This had little effect on prices, as cash wheat prices continue to hover at multi-year lows.”
Despite the competition from Russia, Mr. Ehmke said there is good news for U.S. wheat. Specifically, the United States stands to benefit from Southeast Asian and Latin American countries that are increasingly demanding the higher quality wheat that only the United States can provide. Additionally, wheat elevator operators and merchandisers will have opportunities to gain from storage and carry in the futures market, he said.
“Wheat’s demand story is also a bright spot,” Mr. Ehmke said. “Global demand for wheat marks new records each year as the market builds a stronger demand base amid low prices and creates opportunities for price recovery in the future.”
While the United States is the world’s largest soybean producer, Brazil has moved to the top in terms of exports, and the latter continues to expand acreage in an effort to meet increasing demand from China.
In his report, Mr. Ehmke said Brazilian soybean acreage is expected to continue growing at a pace of 2% to 3% per year through 2020. In the past, Brazil has encountered challenges to delivering soybeans, but those challenges appear to be dissipating thanks to investments in transportation infrastructure.
“The upside for soybeans is the consistent growth in global demand for livestock feed in the form of soybean meal and for vegetable oils in emerging Asia,” Mr. Ehmke said. “The modest but steady growth in biodiesel production will add further to demand long term.”
Finally, in the case of ethanol, the next few years may be an “uphill battle,” Mr. Ehmke noted in the report.
“Domestically, rising fuel efficiency will continue to pressure per capita gasoline and ethanol consumption,” he said. “Total fuel consumption will grow along with the population and will be supported by drivers that switch to lower fuel-efficient vehicles like SUVs amid low gas prices. However, the long-term structural changes to demand will create headwinds for growth in domestic consumption.”
Mr. Ehmke said Brazil’s expansion into corn ethanol production and its tariff on U.S. ethanol will hurt U.S. exports to Brazil and force the United States to look for other growth markets, including Mexico, Thailand, Indonesia and India.
Without strong demand growth, U.S. ethanol producers face a future of weaker crush margins, Mr. Ehmke said.
“A continuation of breakeven to negative margins will pressure marginal players (destination plants and/or aging facilities) to consider exiting the industry,” he said. “Persistent low grain prices — in the absence of major weather events that sharply reduce corn production — will be the silver lining for ethanol producers.”