Corn prices hit record highs this past August when they soared to over $8 a bushel, in large part because the drought hammering U.S. farms decimated corn stocks. Such prices were a windfall for Midwest farmers who actually had corn to sell. But could high corn prices hurt farmers if they drive buyers looking for cheaper grain and feed to South American farms?
This past summer, for example, East Coast companies Smithfield Foods Inc. and Nash Johnson & Sons Farms Inc. decided to buy 750,000 tons of Brazilian corn to feed their hogs and chickens. Their rationale? That the cost of domestic corn was higher than buying grain from Brazil and shipping it to the East Coast.
Reuters also recently reported that one of the country's four biggest grain exporters, Bunge Ltd, shipped Brazilian corn to the U.S. after poor weather cut the domestic corn output.
"The current market environment, shaped most notably by the severe U.S. drought, has been and will continue to be volatile and complex for everyone who participates in our industry," said Bunge Chairman and Chief Executive Officer Alberto Weisser.
But will this be a permanent shift? The U.S. is by far the largest corn producer in the world. Even with this year's drought, the United States Department of Agriculture predicts (PDF) that U.S. farmers will export around 31 million tons of corn in 2012-13. True, that's the lowest amount of corn the U.S. has exported in 40 years. But it's way higher than competitors like Brazil will export -- a record 19 million tons of corn in the coming year, according to the USDA -- or Argentina, which is predicted to export 16.7 million tons of corn in 2012-13.
Since August, domestic corn prices have also come down about a dollar a bushel. Export prices have adjusted accordingly, according to the University of Missouri Food and Agricultural Policy Research Institute. In June, the difference between the average U.S. corn export price and the average Argentinian corn export price was $57 a ton. Now that price difference has closed to $32 a ton.
The institute's director, Patrick Westhoff, says in general though, corn prices from all exporters tend to move together and large gaps in the prices of corn won't last forever.
"A large gap in prices would cause everyone to buy the cheap corn and no one to buy the expensive corn, which would, of course, make the cheap corn more expensive and the expensive corn more affordable," said Westhoff. "While it’s not correct to say there is a single world price for corn, it’s probably more true for corn than for most other commodities."
If the U.S. harvests a more normal corn crop next year, Westhoff added, corn prices around the world will fall sharply from current levels, which will lead to at least some recovery in U.S. exports.
Kevin Roepke, who is manager of global trade for the U.S. Grains Council, says that he doesn't see any danger in letting South American farms supply more corn than usual during bouts of bad weather in the Corn Belt.
“This is just how we’re all going to survive ups and downs,” Roepke said.
Yet, new relationships between buyers and South American countries caused by the drought have the potential of taking hold long after the drought has left the Midwest. At an export industry conference held in Minneapolis in October, grain buyers said that China, one of the world's top corn importers, didn’t plan to buy any corn from the U.S. between now and next spring due to high U.S. prices. Instead, for the first time, China will buy corn from Argentina. Buyers also said that China is working on future grain deals with Brazil and the Ukraine.