–Corn ending stocks projection up 25 million bushels.

–U.S. corn export forecast reduced to 1,875 million bushels.

–Feed and residual use of corn raised, barley trimmed.

–What's behind the rise in East Europe's corn exports.

Carryout stocks of feed grains in 1997/98 are projected at 28.5 million metric tons, up 0.7 million from a month ago, due to lower exports. Domestic use is up slightly as larger prospective corn feed and residual use outweighs a small decline in barley. Price expectations are down slightly for corn and sorghum in response to the dip in total use and prospective gain in stocks.

There was no change in U.S. feed grain production this month, forecast at 265.2 million tons, pending the release of final crop estimates in January. Feed grain supplies are down slightly at 294.9 million tons due to a small reduction in forecast barley imports.

The market is expected to be fairly quiet in the next few weeks, reflecting the holiday period and anticipation of benchmark data released in January. In addition to crop production estimates, grain stocks on December 1 will be reported, allowing an assessment of disappearance for the September-November quarter. While the pace of corn exports has been very sluggish, domestic use has been relatively brisk. In contrast to corn, barley exports have been moving at a torrid pace.

Projected ending stocks of corn in 1997/98 are up 25 million bushels this month as an increase in feed and residual use is more than offset by a cut in exports. Although stocks will be up from 884 million bushels in 1996/97, they will be below 1 billion bushels for the third consecutive year, indicative of a continued tight supply demand balance. The ratio of stocks to use is projected at 10.3 percent, up slightly from 10 percent the year before.

Feed and residual use of the four feed grains plus wheat is forecast at 168 million metric tons in 1997/98, up almost 2 percent from the previous year. Corn will account for nearly all of the increase, with sorghum, barley, and wheat (on a September-August year) expected to decline. Because animal inventories are up, the grain used per grain consuming animal unit (GCAU) is expected to shrink slightly.

Corn feed and residual use is forecast at a record 5,650 million bushels, up 25 million from last month. This offsets a 10-million-bushel reduction in barley feed and residual to 160 million bushels. If this forecast is realized, barley feed and residual would be lower than in the drought year of 1988/89 and the lowest since the early 1950's. The key factor limiting the barley feed and residual is the huge spike in exports this year, with dramatic gains in sales to Saudi Arabia and continued sales to Japan. This month, the forecast barley supply is also down slightly due to a 5-million-bushel reduction in forecast imports to 35 million bushels.

The forecast season average farm price of corn is reduced 5 cents on each end of the range to $2.40-2.80 per bushel. This is mainly because of sagging export prospects and the outlook for slightly larger stocks. Similarly, the sorghum price forecast is also down 5 cents to $2.10-2.50 per bushel, reflecting the strong influence of corn.

Farm prices over the first 3 months of the 1997/98 marketing year have quite low relative to a year ago, but reasonably firm when judged over a longer time frame. In 1996/97, the weighted average corn price for September-November was $2.87 per bushel. This was the transition between the severely tight market of the year before and the impact of more abundant new-crop supplies. This year, the price will be down more than 30 cents, judging from the simple average of $2.52 (including the preliminary November price).

Corn prices are expected to rise somewhat over the next few months, assuming a typical seasonal pattern, before weakening in the summer if new-crop prospects are favorable. However, there is a great deal of uncertainty linked to different market influences. There has been a progressive slippage in export forecasts in recent months, stemming from unexpected exports by China, then increased exportable supplies of feed wheat, and now more corn exports from Eastern Europe. Moreover, there is concern about more weakness in import demand if the Asian economic crisis worsens. Nevertheless, prices have been quite resilient in the face of this news, underpinned by solid domestic demand. Furthermore, the market may retain a risk premium due to widespread fears about the potential of El Nino to harm future production. Finally, some analysts raise the possibility that China could become a significant importer later in the year.

The final season average price of corn received by farmers in 1996/97 was $2.71 per bushel. This reflects prices weighted by marketings for which data were just recently released. The data tend to confirm anecdotal reports that farmers held on to their corn a bit longer than normal. Some analysts expect this pattern to continue as farmers position themselves to catch any late season price rallies. While prices do tend to rise seasonally, there is also risk in this strategy if prices fail to cover added storage costs and the grain is not priced in advance.

In 1995/96, when there was a short corn crop, a higher than average share of 46 percent of marketings occurred in the first 4 months, before prices had skyrocketed on their way to record highs. This pattern was similar to 1993/94, another year of crop problems and reduced output, except that prices in that year increased only moderately. Average September- December marketings during 1980-94 were about 40 percent.

During 1996/97, farmers marketed less than 37 percent in the first 4 months, a bit below the record harvest year of 1994/95 and the lowest since 1986/87 and 1987/88. The recent market environment features more robust demand and no burdensome stocks, a dramatic difference from during the mid-1980's. During the 1986 and 1987 marketing years, use of the loan program and farmer-owned reserve both peaked. Deficiency payment outlays hit record highs in those years.

Forecast 1997/98 U.S. corn exports dropped 50 million bushels this month to 1,875 million because of increased competition from Eastern Europe. The October/September forecast is down 1 million tons this month to 47.5 million, less than 1 million above last year. The early season pace has been unspectacular, with Export Sales data indicating November 1997 corn shipments of about 3 million tons, half the 6.1 million exported a year earlier. Moreover, as of December 4, outstanding export sales of U.S. corn were down 35 percent from a year ago. During most of 1997, U.S. corn exports have faced strong competition from China in important Asian markets. However, given China's drought-reduced crop harvested this fall, its corn exports are expected to taper off sharply for the rest of the year. U.S. exports are still forecast to increase from 1996/97 with reduced competition from China expected over the rest of the marketing year. However, the macro-economic developments in several Asian countries have potentially dampened demand. Moreover, just as corn export sales by China dropped off in recent weeks, sales from Eastern Europe, especially Hungary, increased.

Eastern Europe has a long tradition of corn production and exports. For example, before World War II the region's exports were generally larger than U.S. exports and Romania was the world's second largest corn exporter, trailing Argentina. Parts of Romania, Serbia, and Hungary enjoy the combination of adequate rainfall, excellent soils, and appropriate temperatures for growing corn in abundance. Much of the best land for growing corn in Europe is in these countries plus the Ukraine and parts of Russia near the Black Sea.

During most of the 1960s and 1970s Eastern Europe (not including the former Soviet Union) exported over 1 million tons of corn per year, with most being shipped to the Soviet Union or neighboring countries. However, during most of the Communist period the region as a whole was a net importer, led by Poland.

However, beginning in 1989 and 1990, political/economic changes disrupted agricultural production, transforming production and demand for corn. East European corn area fell from 7.4 million hectares in 1986 to 6.4 million in 1990. Production fell as large production units were dismantled in several countries, fertilizer and pesticide use dropped as subsidies ended, and large irrigation systems collapsed. At the same time, a liquidation of livestock and poultry reduced domestic demand. War and economic embargoes were particularly disruptive in the former Yugoslavia. Weather was not particularly cooperative, corn exports dwindled, and the region was a large net importer from 1987 to 1990.

In 1991, despite continued low input use, favorable weather boosted average yields to near record levels. With increased production and domestic demand limited by reduced animal numbers, and fairly attractive prices on the world market, the region exported 3.2 million tons, much of it outside the region. Antiquated port facilities and high transportation costs from producing regions to ports limited exports. However, in the next several years production was much lower, despite increased area, and exports slumped. By 1995 and 1996, economic chaos had subsided somewhat in most countries, weather was reasonable, and corn production increased while animal numbers remained low. Exports increased, but were still limited by poor infrastructure. When the region was exporting to nearby countries, most shipments were by rail, but as more exports now move outside the region, shipment to a port is crucial. Hungary has had to export either through war-torn Former Yugoslavia, or through Romania, where increased grain handling capacity at the ports has come slowly.

In 1997/98, Eastern Europe is forecast to produce 30 million tons of corn, up almost 20 percent from a year ago, and the largest in 6 years as good weather boosted yields. This month, Romania's corn production forecast increased 1.5 million tons to 12.0 million, up 25 percent from a year ago, despite a drop in area planted because of low prices, high carryover stocks, and lack of government support. Yields jumped a spectacular 33 percent despite reduced use of inputs such as fertilizer and irrigation. However, the increase in corn exports will be limited by logistical problems, especially because much of the port capacity has already been booked for Hungarian grain. The former Yugoslavia is also forecast to boost production 25 percent this year, reaching 9.5 million tons. In Hungary the crop did not increase as much, but export sales have been aggressive, and exports are forecast to reach 1.2 million tons, while the entire Eastern Europe is projected to export 2.9 million.

The port capacity on the Black Sea is a particular constraint on Eastern Europe's corn exports this year because both the corn and wheat crops were large. Wheat of normal milling quality has a higher value than corn and usually has priority at the ports. However, a large part of Eastern Europe's wheat crop was rained on at harvest, and the quality, never particularly high, was reduced in many areas to feed-quality. Low ocean freight rates have made it possible to sell corn and feed wheat out of the Black Sea to markets as far away as South Korea. However, the inland transportation and ports are enough of a bottleneck that corn prices at the Danube in Hungary have recently been as low as $60 per ton, while Fob Black Sea corn is $105 per ton.

If transportation infrastructure and port capacity constraints were not so binding, Eastern Europe would export significantly more corn and feed wheat this year than is currently forecast. The long term prospects are that with peace and more economic stability, investments will be made. The region's animal numbers are likely to grow over time, increasing domestic demand for grain. However, USDA's baseline projections indicate that, given the favorable resources of soil and climate, grain production is likely to grow faster, making Eastern Europe an ever more important competitor for U.S. corn.

December 12, 1997 Economic Research Service

USDA, Washington, D.C.

LIVESTOCK MONTHLY Rising Pork Production Dampens Prices
COTTON OUTLOOK U.S. Cotton Crop Forecast Unchanged
OIL CROPS OUTLOOK World Snatches Up U.S. Soybeans And Soybean Products
WHEAT OUTLOOK U.S. Wheat Forecasts Mostly Unchanged For 1997/98
FEED OUTLOOK Weaker Export Outlook Leads To Small Increase In Feed Grain Stocks

Consensus National Futures and Financial On Line Index

Added to the WWW 12-19-97
Last updated on 12-19-97

Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com

wmeubank@ocp.kcmo.com