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Kub's Den
Thursday, January 17, 2019 12:32PM CST
By Elaine Kub
DTN Contributing Analyst

The corn market had been moseying in an upward direction through fall and winter, and then, upon approaching the higher end of its long-term sideways range, it started moseying back away. Front-month corn futures haven't ventured below $3.01 or above $4.39 1/4 per bushel since June 2014. They haven't even ventured above $3.90 since June.

But there are some nice things to say about a stable corn market: It allows both domestic and global demand growth to continue, unimpeded, without worries about price rationing or demand destruction. And it quiets down any consumer's temptation to fret about the cost of food commodities underpinning everyone's grocery bill.

Corn producers ought to be interested in the comfort and profitability of their customers, and their customers' customers. So let's take a look at corn customers' profitability, sector by sector. The federal government's shutdown gives us the opportunity this month to discuss corn usage categories in general terms, without getting too bogged down in precise numbers, and without breathlessly agonizing whether a 10-million-bushel boost or cut in ethanol usage projections, for instance, should send the futures market into a tizzy.

Instead, let's think about the corn market's customers as if they were a focus group -- who likes what they're buying these days, what do they like about it, and how well is it working in their business? Corn users can be separated into the following buckets, listed in order of the overall size of their demand: livestock feeders, ethanol producers, export customers, then the elevators and bins full of the corn market's leftover inventory (ending stocks), and finally food usage, seed corn, and other industrial processing.

Here's how each one's profitability is looking:

LIVESTOCK FEED

Because some of the corn sent to ethanol plants ends up back in the livestock feed market as distillers grain (but not all of that distillers grain ends up in the domestic livestock feed market; some of it gets exported), we can assume that livestock feed uses up somewhere north of 1/3 of the overall U.S. corn supply, but something less than 40% of the overall supply. It's therefore the biggest market segment for the corn industry, just like it's always been.

And the good news in early 2019 is that feeding corn to livestock is penciling out as a favorably profitable activity. The classic 'cattle crush' trade of buying feeder calves and deferred corn, offset by selling deferred live cattle, has had a great run during December 2018 and January 2019, as live cattle prices have rallied while feeder cattle prices have generally sagged (and corn, of course, has moved sideways). There was some time in mid-2018 when cattle feeding didn't look too promising, but at the end of the year, the cattle crush calculation looked not just profitable but actually 6% more profitable than the year before. The U.S. dairy herd size is falling, but the growth prospects for other animal feeding segments, like hogs (the June 2019 lean hog contract remains 14% above its mid-2018 low) and poultry (also expanding) remains a good reason to be optimistic about continued stability in corn prices.

ETHANOL

As DTN Staff Reporter Todd Neeley detailed in his Jan. 15 article, Ethanol Margins Show Signs of Life, it's currently possible for some U.S. ethanol plants, if they don't have a lot of debt to service, to pencil out a small profit again after several months of chewing up cash or shutting their doors during a weak energy price environment.

Read the article here: https://www.dtnpf.com/…

Prices for dried distillers grains (10% moisture) are running about 6.5% higher than a year ago at this time. So although ethanol hasn't lately been the thriving, profitable customer that the corn market would like it to be, there is reason to be hopeful.

EXPORTS

Mexico is expected to purchase about 4% of the U.S. corn supply, and Japan is expected to purchase about 3% of the U.S. corn supply. The export demand from those two countries together is roughly equal to the export demand from all other countries combined. And although the price of corn gets more expensive for foreign end users who must also pay shipping costs above and beyond the domestic price of U.S. corn, we can nevertheless assume those customers are using the grain to feed animals or produce fuel with roughly the same economic prospects as U.S. corn users.

ENDING STOCKS

There aren't really any "profitability" calculations for ending stocks. The grain just sits there (presumably over 1.7 billion bushels of it, or an 11.8% stocks-to-use ratio). However, with the March-to-May futures spread sitting at 8 1/2 cents or about 70% of the full commercial cost-of-carry, we can assume that the grain companies who handle and store all that inventory are yet another segment of the industry that should be doing well at the moment.

FOOD, SEED, AND OTHER

Some 2019 corn seed has already been purchased and paid for, but some hasn't, and the overall demand remains to be seen, given all the implications of crop insurance pricing, and ultimately, spring weather. In any case, the overall price of seed corn in 2019 is expected to dip only slightly since 2018, if at all. Let's assume this last demand segment will also remain profitable.

That's all pretty favorable, and it doesn't suggest any major change to that sideways trend of relatively stable corn prices.

What I did notice here was the power of diversification. If, during one timeframe, ethanol profitability struggles, there is still demand from livestock feeders and other industry segments, and vice versa.

The corn industry should pat itself on the back for all the planning and booster work it has done over the past 15 years or so to achieve such diversification -- and such resilience.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(BAS/SK)


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