While prices for corn and soybean meal may be down from the sky high levels that we experienced in the summer of 2008, the reality is that the ratios of livestock prices to feed, often seen as a barometer for producer profitability, still remain well below the long term average levels. A number of factors may have contributed to skew the ratio relationships but that still does not overcome the fact that beef and pork producers remain in the red as meat prices have not kept up with the appreciation in feed prices.

With corn and soybean harvest nearing the finish line, producers and market analysts are turning their attention to the demand picture. It happens every year at this time as demand unknowns outweigh supply risk. On the demand side, the market still is grappling with the implications of a slower than expected export pace. Despite a weak US dollar, US corn shipments are running behind the USDA projections. This may be due to the slow pace of harvest as well as quality issues with this year’s crop. Foreign buyers may also be bidding their time, hoping for a break given the rally in corn prices during the past three months. The rally in corn prices likely was further exacerbated by the fact that currencies of some large buyers of US corn have yet to show major gains vs. the US dollar. While US corn exports to Japan are up 4 per cent for this calendar year, exports to Mexico are down 21 per cent and exports to S. Korea are down 31 per cent. Also, feed demand in some markets has suffered due to reductions in animal units. US corn exports to Canada in 2009 are down 39 per cent compared to the same period a year ago.

Another demand factor going forward is the use of corn in ethanol production. As the chart above shows, ethanol producer margins are on the mend. According to a model developed by Don Hofstrand of IA State, ethanol margins in November were +45 c/gal over all costs and +66 c/gal over variable costs. The last time the industry saw such margins was in May 2007. The improvement in profitability reflects the steady improvement in ethanol prices. According to the IA State calculations, ethanol prices in November were up 33 per cent compared to the average price in Q1 of 2009. By comparison, corn prices in the same time frame are up just 2 per cent. Natural gas prices are also low at this time, which has helped contain production costs. With the improvement in profits, the ethanol industry has been trying hard to expand its market. The main barrier to expansion has been the 10 per cent blending limit and an ethanol industry group petitioned the EPA to waive the current blending limit and allow for up to 15 per cent ethanol use in gasoline. EPA yesterday announced that the final decision in the matter will not come until May of 2010 as more tests are needed. This should punt the issue down the road and help contain corn prices in the short to medium term. The potential for higher blending limits should make for some interesting planting decisions this spring. Higher blending limits will likely require a significant increase in corn acres. Interestingly, the decision will not come until the new crop is planted likely making for an explosive corn market in the second half of 2010 and into 2011.