Grain crops are being gobbled up faster than farmers can grow them, and that could portend trouble down the road if production doesn't catch up, says Chris Hurt, a Purdue University agricultural economist.
There have been two major demand surges in the past five years, including the rising use of corn to produce ethanol and China's purchases of soybeans, Hurt says. The former has been driven by government biofuels mandates and high oil prices, while the latter is the product of China's growing food demand brought on by rapidly increasing incomes that have enabled the Chinese people to buy more food.
"These greater levels of usage have placed a strain on the agricultural production system, resulting in low inventories that leave little room for any production shortfalls," Hurt says. "Producers certainly have responded to try to meet those demands, but what we've seen is that demand has really outpaced the ability of the world to supply."
Inventories of corn and soybeans are near "bare minimums" in the United States, Hurt said, with wheat stocks in better shape.
Many years going into harvest there would be enough corn and soybeans in storage to last 45-60 days, or more, Hurt says. That likely won't be the case this fall.
"With corn, it looks like we could be down to about a 24-day supply at the end of this marketing year," he says. "That, of course, means any further threats to the 2011 crop yields would send markets into deeper shortages and higher prices."
Most of the corn grown in the world becomes livestock feed. But in recent years ethanol production has claimed a larger percentage of the crop, leading to increased corn acreage and higher prices, Hurt says.
"Fifty-nine percent of all the growth in corn use in the entire world over the last five years has been in a category where ethanol would be placed: industrial use," he says. "Here in the U.S. over the last five years 100% of the increase in corn usage is for ethanol, representing 2.5 billion bushels of corn."
About 27% of the U.S. corn crop is used for ethanol, compared to 10% in 2005, Hurt estimates. All told, 16 million additional acres of corn from the 2010 crop was required to produce ethanol vs. 2005.
Soybeans also will be in short supply this fall, Hurt says. The USDA estimated the domestic soybean supply might be just 22 days on Aug. 31.
The U.S. experienced a 60% growth in soybean exports between 2005 and 2010, with China accounting for the growth, Hurt says. China tripled its purchases of U.S. soybeans in that five-year period, from 8 million acres to 23 million acres.
To satisfy the world's hunger for food and fuel, American farmers have their work cut out for them.
"Either of these demand surges would have had significant impacts on crop prices, farm incomes and land values, but because they were both big and came at the same time the impacts were even larger," Hurt says. He sees some of the major farm issues playing out like this: