Can the U.S. both feed and fuel the world? America exports about 20% of our 78-million acre corn crop each year — the equivalent of 2007 projected ethanol feedstock needs. This begs the question of whether ethanol will gobble up export stocks since it will consume 63% more corn this year than it used just two years ago.

“The U.S. will still need to produce an extra billion bushels of corn by next fall, assuming that U.S. farmers give up rotation practices, don't increase wheat plantings, and leave soybean plantings to the South Americans,” says Justin Kelly, director of marketing, E-Hedger, Chicago, IL. “This scenario assumes no export rationing and very little feed rationing. The U.S. will need to find the corn bushel-equivalent of another Minnesota, half of Illinois or half of Iowa.”

Put another way, Iowa will see virtually its entire current corn harvest fuel its ethanol plants as plants on drawing boards come online, predicts Iowa State University (ISU) economist Bob Wisner.

That's a lot of corn, “and how the market adapts to this increased demand is likely to be one of the major developments of the early 21st century in U.S. agriculture,” says Allen Baker, economist with the Economic Research Service (ERS).

Even so, the U.S. exports the lion's share of corn worldwide, says Ward Nefstad, agricultural economist at the University of Minnesota. “We really don't have as much competition as people think,” he says.

The U.S. produces 70% of world corn exports, followed by Argentina at 12-14%,” says USDA's World Agricultural Outlook Board Grains Analyst Jerry Norton. Argentina halted its corn exports in November, underscoring the tightening of global corn supplies.

Among world soybean exports, the U.S. supplies 44% of world trade volume, exporting a record 31.1 million metric tons (mmt).

China is the largest U.S. soybean customer, representing 29% of the dollar value of our soybean and product exports. Japan is the second largest importer, buying 13% of U.S. soybeans, followed by the European Union (EU) and Mexico. Canada has been the largest purchaser of U.S. soybean meal, followed by Mexico and the Philippines.

Here are details on the top corn- and soybean-producing countries (after the U.S.), and the major constraints and advantages shaping their future exports:

Argentina

This year the second largest corn exporting country is projected to export 11.5 mmt, or 14% of America's corn exports. Its corn exports are projected to expand 3% by the 2009-10 export year due to better weather after unfavorable conditions reduced last spring's harvest.

“They're planting corn right now in Argentina, but we're not seeing the price response we'd like to see (to rising prices),” says Edward Allen, senior research economist at ERS. “This is because staying in soybeans means fewer taxes. Its government taxes the export of other ag commodities in order to keep internal prices from rising. And the Argentine soybean processing sector is so developed that it maintains a definite incentive for their farmers to remain in soybeans.”

Argentina has made major advances in corn yields, but South American yields are still 33-50% of U.S. yields.

Argentina also supplies 10% of the world's soybeans and 53% of its soybean meal. Its tax structure favors adding value as meal.

China

China is the world's third largest corn exporter. This year USDA World Agricultural Supply and Demand Estimates anticipate China exporting 4 mmt, or the equivalent of 7% of the U.S.'s corn exports. Its past three corn crops have been bumper crops, and its consumption has grown dramatically as its population, standard of living and livestock numbers all increase.

China consumed nearly everything it produced this year, says Jerry Bange, USDA World Outlook Board chairman. USDA projects that China will become a net corn importer between 2008 and 2012.

“China is an enigma rolled into a conundrum” when it comes to following market economic signals, Allen says. “We have forecast China to become a net importer of corn for at least a decade, and we've been wrong. Its export subsidies and mandated high corn prices increase production.

“Corn is a major Chinese staple, both for human and livestock consumption,” Allen says. “As incomes rise, more of their corn feeds hogs.”

China has surplus corn in the north (formerly Manchuria) and is short corn in the south. Because South Korea is closer to Manchuria than south China, China exports from the north to nearby Korea while importing corn in the south.

When China becomes a net corn importer, “substantially increased U.S. corn export demand can be anticipated in the years ahead,” says Iowa State's Wisner.

As both a producer and a consumer of world grains, China has enormous influence. It has 25% of the global population and just 7% of the arable land in the world, says Al Kluis, president of Northland Commodities, Minneapolis, MN. “As an additional 345 million Chinese move from rural to urban areas in the next 25 years, Chinese, U.S. and South American farmers will be challenged to grow enough food and feed.”

The energy markets have reminded Americans what it's like to be vulnerable to demand-side factors such as China, says USDA's Chief Economist Keith Collins. Until now, U.S. markets have moved more from supply-side factors such as weather.

Brazil

Brazil provides 37% of the world's soybean exports. (By comparison, the U.S. provides 44% of world soybean exports.) In the past, Brazil had a large and clear cost advantage in soybean production but it has been eroded in the last three years by an adverse exchange rate and high costs of controlling Asian soybean rust, Wisner says. With rising corn prices motivating farmers to shift 10-15 million U.S. corn acres away from soybeans in the next several years, soybeans may just default to Brazil, Nefstad, says. “They have the competitive advantage in returns per acre because their land is so inexpensive.”

Brazil is a major corn grower, but exports little to none of it. In interior areas, transport costs nearly equal the price of corn.

Brazil's corn yields would need to roughly double in order to overcome those costs for export, Wisner says.

The big question is, “How will these higher corn prices overcome South American currency valuation issues and spur production in Brazil's Campo Cerrado?” says Allen. “It is scrub savannah, larger than the state of Iowa, and there is already an enormous increase in soybean production there since 1985. The question is not if but how fast this will happen. The other issue there will be the distance to market; in some cases over 1,000 miles. If they grow a grain for export, there's more money to be made in beans.”

If we get to $6-7 beans vs. $4-5, “that makes a huge difference in Brazilian infrastructure to move soybeans out to world markets,” says Bruce Babcock, director, Center for Agricultural and Rural Development at ISU.

Brazil is a victim of its own success, Allen says. “The economy does so well that it strengthens its currency, which puts its farmers into competition with its other exporters. Brazil is a large and complex economy, one of the most diverse in the world. If the market works, they will become more efficient over time.”

Affordable and available credit in all of these potential grain-exporting countries is difficult at best, says Ed Lotterman, agricultural economist and author of the weekly column “Real World Economics.”

At $27.5 billion, Brazil's agro-food trade surplus is the largest in the world, according to USDA's Amber Waves magazine. “Soaring demand in China has driven much of Brazil's export growth. Its agro-food sector accounted for over two-thirds of its total trade surplus in 2005. Brazil's success in world markets has given U.S. farmers a powerful competitor.”

Others

The remaining world exporters of corn include parts of the former Soviet Union, the EU and South Africa. Among them, one of the more promising may be new EU member states, Babcock says. “Hungary, Romania, Poland and Central Europe are doing a good job modernizing economies, financial markets and their farms.”

The EU market is tightly controlled by its grains management committee, which uses intervention stocks and import/export licenses to control its domestic markets and trade, says USDA's Jerry Norton.

The export potential of other world grain belts is limited by political instability, as in Ukraine and South Africa.

“Political instability (also found in Argentina) makes for poor long-term infrastructure,” Babcock says. “World hunger is more a problem of government failure than of arable land.”

Allen adds, “The Ukrainian government worries about inflation like the Argentines do, which limits exports when prices increase. Instead of exporting corn, Ukraine will convert it into pork as incomes grow.”

South Africa should produce a lot more corn than it does, based on its climate and soils. “Land reform there breaks down large efficient farms,” Allen says. “Uncertainty about ownership may limit investments needed to expand.”

The world's grain markets sit at historic crossroads, shaped by added corn demand and rising incomes in developing countries. As economists polish their crystal balls, the question becomes how these three forces settle: the balance between U.S. corn and soybean acreage, what China does as the world's dominant soybean importer and how Brazil responds given the value of its currency. “These factors are very much up in the air,” Norton says.

How Will Our Export Customers Respond To Price Increases?

Two of America's biggest customers, Japan and Taiwan, have healthy appetites for corn and soybeans. Their relatively high incomes and scarce farmland portends continued purchases, albeit at rising prices.

“In contrast, Canada, another high-income country, has substantial corn production and could increase its output of corn, wheat and other feed grains,” says Allen Baker, economist with the Economic Research Service (ERS). “Egypt and the Central America and Caribbean region are likely to be the most responsive to higher prices.”

Higher income countries will be able to bid corn away from those lacking the income for continued meat consumption, USDA's World Agricultural Outlook Board Grains Analyst Jerry Norton says. “We can expect higher prices over time.”

They are more likely to cut back corn use, increase domestic corn production or seek out substitutes.