World Grain - July 2011 - 36

FEATURE: KEEPING A CLOSE EYE ON CORN

Steve Freed of ADM Investor Services, Inc. discusses the world wheat situation. Photos by Becky White.

Lapp said there were three other major factors driving up the price of corn and other grain commodities: the weakening of the U.S. dollar; strong economic growth in developing countries, particu-

larly China, which has led to increased food consumption; and the ongoing impact of the ethanol industry’s insatiable demand for corn. Lapp said he doesn’t believe speculators in the agricultural commodities markets have had as big an impact on prices as some other analysts. Since 2002, the value of the U.S. dollar has declined by about one-third, Lapp noted. “The weaker dollar has meant stronger commodity prices,” he said. “We ﬁrst saw it in crude oil and then we started to see it in the agricultural commodities.” But just as important has been the remarkable economic growth in China and other developing countries. Lapp noted that from 2000 to 2011, China’s GDP growth (on a real average annual percentage basis) has been almost 10%, while the rest of the developing world has been more than 6%. Meanwhile, the average GDP growth rate

during that period for the U.S. and other advanced economies has been around 2%. Lapp said Chinese meat consumption has risen 23% since 2000, which has meant skyrocketing demand for soybean meal, mainly from South America. That trend is expected to continue for the foreseeable future, meaning the call for more oilseed acres will probably come at the expense of other crops, he said. The question regarding China that doesn’t appear to have a clear answer at this point is: Will it eventually import signiﬁcant quantities of U.S. corn? “That still underlies my thinking on why our downside may be limited in corn prices, because at some point I think they’re going to want to build a reserve,” Lapp said. The other issue causing signiﬁcant upward pressure on prices, Lapp said, perhaps to a lesser extent than the weak dollar and growing food demand in developing countries, is the biofuels industry. Over the past decade, 46% of growth in demand for coarse grains has come from ethanol. “So if you take China’s 17 percent increase in coarse grains and another 46 percent in biofuels, the other 5 billion people can take whatever scraps are left to feed their people,” Lapp said. The good news for non-biofuels companies that purchase corn, he said, is that the U.S. mandate for ethanol production will soon level off. The mandate, which began at 4 billion gallons in the early 2000s and is currently at 12.6 billion, is only scheduled to increase by 2.4 billion gallons over the next decade, peaking at 15 billion in 2022. “It’s late in the game, in my view, in terms of ethanol,” Lapp said. “We’re near the end of the ethanol boom and that’s been almost half of the total growth and demand.” Lapp closed his presentation by showing a chart dating back to 1866 that highlighted the various price plateaus that had occurred in the corn
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World Grain - July 2011

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